One of the biggest surprises of the current collapse of the troubled Californian utility, PG & E, is the possibility that it is considering taking out a DIP loan prior to a bankruptcy filing that would have caused a drop in actions of PCG and an overwriting of its obligations, the rating agencies had always ranked the company in the investment category.

Late in the night, this issue was somewhat resolved after S & P became the first rating agency to rank as a machete for PG & E, when it degraded the company by five notches, from BBB at B, the fifth highest rating. S & P has warned that further cuts are imminent.

As previously announced, PG & E shares plunged to 25% then 17% on Tuesday, reaching their lowest level since 2003, as investors feared the company would go into debt. bankruptcy while California investigators investigate whether utility equipment has unleashed the most lethal fire in the state's history in 2018, as well as the fires of 2017, investigations that could leave to the company of legal liabilities exceeding 30 billion dollars.

A spokesman for PG & E said in an email on Tuesday that the company's board of directors is "actively evaluating" its operations, finances, management, structure and governance, while maintaining its commitment to improving efficiency. security.

As Bloomberg NotesPG & E's record bond prices underscore how much the company will still have to pay to borrow in the future, even though California has a legislative bailout plan. "It also shows how stocks, even regulated and highly reliable, such as utilities, can be vulnerable to natural disasters such as forest fires and hurricanes."

In the meantime, as we discussed last Friday, whatever PG & E's fate is, it will "ultimately increase costs for California taxpayers and taxpayers, who must already bear a high cost of living" S & P analyst, Gabriel Petek, said in the state of California, not in PG & E. Monday, in an email, said, "What we must remember, it is that these fires and the fact that the "fire season" is practically a phenomenon that lasts all year now represent a significant consequence of climate change. "

In addition to plunging utility bonds maturing in 2034, the company's 3.5% bonds due next year are currently reporting more than 9.9%, a level well above that of the stock market. Most high-yield securities and a deep credit level. As shown in the chart below, debt rated B, the high-income bond intermediary, earns an average of 7.5% at Monday's close, according to Bloomberg index data.

However, while S & P was trading PG & E ratings, Fitch and Moody had not reduced their credit ratings yet. And when they do, the next major puzzle will emerge for both management, shareholders and bondholders, that a similar "high-yield" Moody "turn" would lead to a new execution of AIG's deadly assassin, such as at least once a PG & E guarantee call of at least $ 800 million dollars – to secure electricity contracts – will be triggered in accordance with a regulatory filing (according to Bloomberg, no other rating triggers have been disclosed, although, as AIG has demonstrated, they tend to hide deeply in ancillary contracts and only a deterioration of rating will reveal how socially insolvent).

A $ 800 million guarantee call would be a major problem for PG & E as the company had only $ 430 million in cash by the end of September.. In order to preserve liquidity, PG & E suspended its dividend and used its lines of credit. This event, in our opinion, is the first red light that the liquidity crisis now seems inevitable. Meanwhile, as announced last Friday, the company plans to declare bankruptcy in February.

And while state legislators and regulators are exploring different options, including allowing the company to issue bonds to pay off debts or split the utility, no decision has yet been made.

At the end of the day, however, even the $ 800 million of urgent cash needs would simply not be a decisive step towards bankruptcy if PG & E were ultimately held responsible for the campfire, which would put it for billions of dollars. dollars of potential liabilities, according to some calculations, far more than what the company has access to. However, as the company has already filed for bankruptcy, she and lawmakers will likely try to avoid a repeat, said Ryan Brist, head of Western Credit's global quality credit and portfolio portfolio, which likely includes that a bankruptcy is inevitable. .

"It was a disastrous time for all involved," Brist, based in Pasadena California, said. "I guess the same parties would like to look for a much less volatile solution to this challenge of the thorny problems of forest fires all over the state. "

However, with a long-term debt of about $ 18.6 billion at the end of September, PG & E could be prompted to declare bankruptcy, said analyst Andy DeVries of CreditSights Monday. Such a deposit would give the company bargaining power with insurance companies as it tried to settle customer claims at a lower price, he said.

But before any possible deposit, the next immediate step will be to further reduce ratings of rating agencies, perhaps tomorrow.

Philip Smyth, an analyst at Fitch, said a California regulator's determination that PG & E equipment would be involved in the Tubbs fire in 2017 or last year's camp fire would be most powerful momentum to reduce the grade.

"At the moment, no investigation has clearly determined that their equipment was the catalyst," Smyth said in an interview Monday. "Since we downgraded the rating in November, I do not think the situation has worsened significantly since then."

Finally, PG & E's impending – and rightly – loss of grace is only the beginning of the wave of massive downgrading of investment grade companies, which is expected to hit when the economic cycle turns around. potentially flooding the high yield bond market by more than $ 1.19 trillion with new issues (as Jeff Gundlach mentioned earlier today). On the bright side, this is because PG & E's relatively low debt would not bring flooding alone as strategists Morgan Stanley warned could exceed $ 1.1 trillion.

Xerox was the last company to join the ranks of the "fallen angels", while Altria has been downgraded from simple A to BBB. It remains to be seen if PG & E will avoid bankruptcy, but one thing is certain: the Californian utility will be the next "Fallen Angel".