Morning Commentary: PG&E secured convertible notes offering eyed

By Abigail W. Adams

Portland, Me., Nov. 29 – The convertible primary market returned to action on Wednesday with a highly anticipated new deal on deck.

PG&E Corp. plans to price $1.5 billion in four-year secured convertible notes after the market close on Wednesday with price talk for a coupon of 4.25% to 4.75% and an initial conversion premium of 30% to 35%.

The deal was heard to be in the market with assumptions of 300 basis points over SOFR and a 21% vol.

Using those assumptions, the deal looked about 2.45 points cheap at the midpoint of talk, a source said.

While investment-grade utility companies have become a well-known trade in the convertibles market over the past year, PG&E’s offering is unique with the utility company still recovering from its spectacular fall into bankruptcy in 2019.

The convertible notes will be secured, which is highly unusual, a source said.

They will be secured on a first-lien basis by PG&E’s 100% ownership interest of the common stock of subsidiary Pacific Gas and Electric Co.

The notes will rank junior to current and future secured obligations secured by assets and junior to secured obligations under its revolving credit facility.

They will be equal to other obligations secured by common stock and senior to the company’s unsecured obligations.

PG&E collapsed in 2019 due to liability costs from California’s deadly wildfires with the company plunging from high-grade status to a bankruptcy filing in the span of one month.

The utility emerged from bankruptcy in 2020 and currently has junk ratings.

There was some debate over the credit assumption with some sources finding the 300 bps spread somewhat conservative while others thought it was slightly aggressive.

While the convertible notes will be secured, “they’re essentially telling you that they’re senior to equity,” a source said. “But they still have a ton of debt.”

The convertible notes will be used to repay a portion of the company’s outstanding $2.66 billion secured term loan maturing on June 23, 2025.

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