Utility Issues: Albatross or Opportunity?
The axiom that investing pits fear against greed is evident among Wall Street’s big money managers as they gamble whether to own the stocks and bonds of Edison International and PG&E; Corp.
And small investors nationwide have a stake in their actions. Many money managers are playing with billions of dollars invested in their funds by individuals directly or through their 401(k) retirement-savings accounts.
Some of these institutional investors--government agencies, pension plans and mutual funds--dumped the utilities’ securities in recent months as the market slashed the companies’ stock and bond prices amid rising risk of bankruptcy.
Yet others are standing pat or are snapping up the securities at what they believe are bargain prices--if they can find sellers. The buyers are betting that Edison and PG&E; ultimately will recover from the crisis and that there is potential for a big payoff.
Buyers include people such as “vulture” investor Marty Whitman, head of the New York money manager M.J. Whitman & Co., whose funds include the Third Avenue Value Fund. “We’ve been trying to buy the [utilities’] secured bonds,” because they’re backed by the companies’ assets and thus there’s a strong prospect of being paid back, contended Whitman, adding that he’s earmarked about $200 million to spend on the utilities’ paper.
Others figure they would lose too much selling now, and in the case of some specific securities--such as the commercial paper and other short-term debt of Edison & PG&E--there; are virtually no takers, analysts and traders say.
Some of the utilities’ big stockholders simply can’t sell. Many institutions--including the California Public Employees’ Retirement System, or CalPERS--hold the stocks as part of their passive investments in “index” funds, which mimic major market indexes. So they’re stuck with the stocks even if Edison and PG&E; end up in bankruptcy.
CalPERS still owns 1.4 million shares of Edison stock and 1.3 million shares of PG&E;, said spokeswoman Pat Macht, but it doesn’t hold any of the utilities’ debt.
The massive turnover of the stocks in recent weeks suggests that many of the shares have gone into the hands of professional speculators, analysts say. But some experts argue that the risk of owning the shares still is too high, even with PG&E; at $10.19 and Edison at $8.94 as of Friday.
In a bankruptcy, common shareholders would be the last to collect on their investment. Ahead of them would be bond owners and secured creditors of the utilities.
Some of the institutions that own the companies’ debt are starting to organize as the bankruptcy threat increases. An ad hoc committee of Edison’s unsecured creditors--those owning debt securities or that have other claims that aren’t backed by collateral--has been formed in Orange County, county Treasurer John Moorlach said Friday.
Moorlach, who disclosed recently that the county invested $40 million of public school funds in Edison notes, said formation of the committee “is critically important in order to protect the rights of each and every unsecured creditor.”
After Edison warned of bankruptcy in December, the county tried to sell its Edison notes but was unable to find any takers at the price it sought, Moorlach has said. So, rather than suffer the loss, he decided to wait for the state to intervene in the crisis.
With Edison’s and PG&E;’s debt selling for 40 to 80 cents per dollar of face value, some money managers said they’d rather take their chances in Bankruptcy Court than sell in today’s market at a huge loss.
“Given their current levels, it doesn’t make sense to sell,” said John Queen, who holds “some” PG&E; and Edison bonds in the $1.5 billion he manages at Merrill Lynch Investment Management in Los Angeles.
Others couldn’t get out even if they wanted to. “There’s not been a meaningful market for [the utilities’] commercial paper at all for the past week,” said Chriss Street, a Newport Beach money manager and the advisor for the new Orange County creditors’ committee.
Many mutual fund managers also are keeping Edison paper in their portfolios “anticipating some sort of workout plan,” said Eric Jacobson, an analyst at Morningstar Inc., which tracks the fund industry.
One is Susan Keenan, who helps manage $11 billion of municipal bonds at Alliance Capital Management in New York, including pollution-control bonds backed by Edison and PG&E.; “This is going to be resolved and bondholders will be paid,” Keenan said. “These utilities have to exist.”
But how they would exist, and what it might cost California to rescue the utilities, drew the attention Friday of Standard & Poor’s Corp., a major bond-rating agency. S&P; placed the state’s $18.8 billion of general-obligation bonds on its “credit watch” list with a “negative” slant, which doesn’t change the bonds’ “AA” investment-grade rating but does mean S&P; has concerns.
“We’re reviewing all of the proposals to see what the final solution is, if that’s going to cost the state and, if so, what it will cost,” said Steven Zimmermann, a managing director in S&P;’s San Francisco office.
*
Bloomberg News was used in compiling this report.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Stock Shock
Shares of PG&E; and Edison International have crumbled in recent weeks on soaring trading volume as many investors have fled the stocks in fear that the companies will file for bankruptcy. Some Wall Street pros say the stocks could be bargains now, even if the companies wind up in insolvency. But most analysts advise investors to stay away.
Source: Bloomberg News
