|
|
Enron Mail |
CC list suppressed...
January 19, 2001 Heard on the Street Amid California Power Crisis, Investors Bet on Utilities Bonds By GREGORY ZUCKERMAN and JATHON SAPSFORD Staff Reporters of THE WALL STREET JOURNAL As lights go out in California, on Wall Street light bulbs are popping over the heads of investors hoping to profit from the electricity crisis. Amid the rolling blackouts, investors with a taste for risk are betting on the bonds of the two struggling utilities, units of PG&E Corp. and Edison International, even as they move precariously close to filing for bankruptcy-law protection. The investors are gambling that the companies have enough assets -- and political importance -- that a solution will be found that will include gains for intrepid bondholders. But some experts advise investors to be careful wading into the energy current, saying it could be a while before the bonds pay off. And they are emphatic that the companies' stocks should be avoided like a downed electrical pole. Over the past few weeks, the debt of Pacific Gas & Electric and Southern California Edison has been downgraded to "junk" status by leading rating agencies, and both utilities have missed debt payments -- usually a huge red flag for investors. Meanwhile, holders of the utilities' commercial paper, which is the shortest-term debt, are doing everything they can do to dump their holdings, though it is getting hard to find takers. But the unsecured, longer-term debt of both companies has remained in demand, trading at around 50 cents on the dollar -- at least 10 cents higher than such debt usually trades at when a company veers so close to a bankruptcy filing. Prices of bonds that are secured by the utilities' plants have actually edged higher in recent weeks, moving from 65 cents on the dollar to about 80 cents -- though the move has come on limited volume. Behind such movements are aggressive investors such as money manager Martin Whitman, of M.J. Whitman. "We're trying to buy the secured [bonds] like it's going out of style, and some of our smartest clients are buying the unsecured debt," says Mr. Whitman, who runs Third Avenue Value Fund, a mutual fund, as well as hedge funds. Mr. Whitman, whose firm also acts as a broker-dealer for distressed debt, hopes to buy as much as $200 million of the bonds in coming weeks. His only frustration is that the prices aren't coming down. The number-crunching by investors works along these lines: At current prices for unsecured bonds, investors could score gains of 20% to 25% annually if principal and interest payments are made within the next two to three years, the average bankruptcy-court stay. For secured bonds paid off within that period, the gain would be almost 15% annually. With quicker payoffs, the return jumps, of course. The two utilities have more than $20 billion in debt outstanding, of which just a small fraction is insured. Why do the bulls -- including distressed-debt specialists as well as funds such as Mr. Whitman's -- see so much value in the utility mess? Unlike the run-of-the-mill troubled company, the utilities are so big, and so important to the California economy, that some form of resolution will likely be found to help them get back on their feet, perhaps by allowing the companies to boost electric rates. Even if a bankruptcy proceeding results, the utilities control sufficient assets to give bondholders a good chance of full recovery of their principal and even eventual payment of any missed interest payments, bulls say. "They're too big and important not to get a solution," says Todd Thompson, a portfolio manager at Conseco Capital Management. "If a theater company or retailer goes away, no one cares, but here there has to be a resolution." Bond specialists also point to their past home runs betting on debt of troubled utility companies -- such as Public Service of New Hampshire, which was under bankruptcy-court protection in 1988 to 1991 and never missed a bond payment. "If there's a liquidation, or if they figure this out, you're going to get paid back" principal payments and accrued interest, Mr. Whitman says. Adds Marc Lasry, managing director of Amroc Investments, a leading investor and trader in distressed debt: "There's been quite a lot of buying [because] at the end of the day you'll get paid. The question is how long it will take." But some caution that the bonds could see weakness in weeks ahead, because some debtholders who want to sell are waiting on the sidelines, hoping to dump their positions, once a resolution becomes more evident. Others caution that the California situation is unlike past utility fiascos where savvy investors made out quite well. The problem in California is a newly deregulated pricing system that has fallen apart, not the overzealous expansion plans that created various earlier problems. A bankruptcy-court filing would raise further uncertainty, perhaps causing more debt to come up for sale. Creditors fear consumer advocates could lobby against an electric-rate increase that many say is necessary to solve the crisis and cover payments to creditors; these advocates may demand that creditors suffer at least some loss in the value of their holdings. Moreover, resolution of the matter could take much longer than the two to three years that some investors are banking on. Even as Mr. Whitman and others place their new bets, many investors who months or even years ago bought the utilities' debt, figuring it was rock solid, are licking their wounds. "We stayed away from tobacco. We stayed away from Japanese banks," says Orange Country Treasurer John Moorlach, who invested $40 million in Edison's commercial paper before the credit-ratings agencies downgraded the utilities' debt. With the two California utilities now rated below other investments that Mr. Moorlach wouldn't touch, he says, "It's frustrating." Mr. Moorlach, as fate would have it, was the man appointed in 1995 to help lift Orange County out of its own financial crisis, one brought on by bad investments. He improved Orange County's finances by prudent investments -- including securities issued by utilities. "This is survivable," he says of his current quandary, "but it's just awkward." Others say the commercial-paper market is one area where investors could suffer further losses, at least in the near term. One reason: There are few potential buyers for tainted commercial paper, because these short-term securities issued by corporations generally appeal only to ultraconservative investors. Both utilities' commercial paper is being quoted for about 50 cents on the dollar. With little being traded, "it's very hard to get rid of it right now," says Sean Egan, managing director at Egan-Jones Ratings Co., who says those reluctant to bid include Wall Street securities firms. Things might get worse. While the commercial-paper holders might eventually get at least some of their money back, some fear those payments won't come soon enough to prevent some money-market mutual funds from seeing the value of their shares "break the buck," or drop below the $1-per-share level, causing losses for supposedly sound investments. Such an event, however, would be rare in the money-market world. As for the utilities' stock, if there is a reorganization of the companies, it could wipe out at least some shareholder value, while bondholders could gain control of the remaining equity. "You're taking huge risks" on the stock, says Mr. Whitman. PG&E shares have dropped sharply over the past few months, falling from a high of about $30 in late summer. At 4 p.m. Thursday in New York Stock Exchange composite trading they were up 13 cents to $9.75. Edison, meanwhile, was up 13 cents to $9 on the Big Board, down from more than $25 in the summer. Yet, as steep as the declines have been, the shares of both utilities still trade higher than is typical for stocks of companies facing the possibility of bankruptcy. "The stock price is irrational," Amroc's Mr. Lasry says. Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Jathon Sapsford at jathon.sapsford@wsj.com
|