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Market Extra: PG&E bonds recoup some lost ground as Dixie Fire rages with no end in sight

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The Dixie Fire in Northern California, the state’s second largest on record, has raged for more than a month, burning a path across the Sierra Nevada and scorching an area twice the size of the city of Los Angeles.

The massive fire comes as about 25% of the Pacific Northwest grapples with exceptional drought conditions and a blanket of wildfire smoke that as of Friday stretched into parts of Minnesota, according to government data.

But despite the crisis, bonds issued by Pacific Gas and Electric
PCG,
+3.92%
,
California’s largest utility, that helped its exit from bankruptcy about a year ago, have begun to stabilize in the month since PG&E said its equipment may have sparked the uncontrolled blaze.

The utility’s 30-year, BBB-rated 3.5% coupon bonds due August 2050 were spotted on Friday at a spread of 226 basis points above Treasurys, a modest increase on the week, but recovering about 15 basis points from their widest spread levels in August, according to BondCliq data.

Corporate bond spreads recently have edged higher, off near record lows, as concerns about the delta variant of the coronavirus and lower liquidity in late summer have worried investors. Spreads are the level bond investors are paid above a risk-free benchmark, often TreasurysBX:TMUBMUSD10Y, to offset default risks.

The calm in the company’s bonds comes in contrast with alarming conditions around the Dixie Fire. It already has burned about 700,600 acres and stretched to five counties, up from 320,000 acres two weeks ago, as drought and dry weather fuel the blaze, which was 35% contained on Friday, according to the California Department of Forestry and Fire Protection.

PG&E this week also cut power, temporarily, to five Bay Area counties to reduce wildfire risks. Its equipment has sparked more than 20 California wildfires in the past several years, killing more than 100 people and burning thousands of homes, The Wall Street Journal reported.

Why would the utility’s bonds rally as the fire ranges? Billions of dollars were raised in June of last year that helped PG&E emerge from Chapter 11, but also left the utility with more debt than it entered bankruptcy with, in part because of its promise to pay billions of dollars’ worth of fire-related claims.

The Wall Street Journal reported earlier in August that most victims of the California wildfires sparked by PG&E have yet to be paid. Claims were set to be funded by its company stock, with shares closing 3.9% higher Friday, but down 25.5% on the year to date, according to FactSet.

Bond investors attributed the recovery in some PG&E bonds to their structure, akin to first-mortgage debt, which gives creditors more confidence about getting repaid first, if another debt overhaul at the utility occurs.

Another crucial factor has been a controversial law passed in 2019 that gives California utilities, including San Diego Gas & Electric, Southern California Edison and PG&E, access a $21 billion state wildfire fund to help them deal with liability issues stemming from utility-caused wildfires, according to bond investors.

Even so, PG&E’s bonds overall have sold off since the Dixie Fire was ignited a little more than a month ago.

Specifically, its 3.25% bonds due June 2023 were off about 32% on a spread basis since mid-July, according to BondCliq data. Those specific bonds weren’t actively trading hands, which can exacerbate price swings.

Pacific Gas & Electric bonds under pressure

BondCliq

But of the most-actively traded PG&E bonds (represented by large red circles) over the past month, the 4.95% bonds due July 2050 only were off about 2.2%, on a spread basis since July 16.

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