Relevant Document:Hearing Agenda
Judge Dennis Montali continued today the final hearing on PG&E’s proposed $5.5 billion
DIP financing in order to give the parties an opportunity to negotiate a compromise addressing the court’s concerns regarding automatic stay relief following the occurrence of an event of default under the DIP credit agreement. The final DIP hearing has been continued to March 27 at 12:30 p.m. ET. Judge Montali indicated that he would not “second-guess” any compromise reached by the principal parties, and would rule on March 27 absent any compromise. The DIP credit agreement requires the debtors to obtain entry of a final order by April 15.
Judge Montali also denied certain California public entities’
motion to appoint a public entities committee, concluding that he did not have the statutory authority to appoint the requested committee under Bankruptcy Code section 1102 because the proposed members would be entities that are excluded from the definition of “persons” in Bankruptcy Code section 101. He approved the debtors’ cash management and operational integrity supplier motions on a final basis and during a brief
hearing yesterday, March 12, Judge Montali approved the debtors’ customer programs motion on a fully consensual basis.
During today’s discussion of DIP financing, Judge Montali emphasized his concerns regarding the provision automatically granting the DIP lenders stay relief seven calendar days following the occurrence of an event of default under the DIP credit agreement. Among other things,
Judge Montali noted that the district court “feels strongly about what PG&E is up to” and could potentially withdraw the reference and appoint a chapter 11 trustee. Judge Montali explained that the bankruptcy court would have to consider that “risk” and the attendant consequences in determining whether to approve the DIP financing. Judge Montali expressed his preference that the bankruptcy court retain some control over the process following a DIP default, including upon appointment of a chapter 11 trustee, instead of the automatic stay lifting automatically after expiration of the applicable period.
After a break, the debtors announced that the DIP lenders had agreed to a period of seven business, instead of calendar, days, following an event of default before stay relief occurs automatically. With respect to the appointment of a chapter 11 trustee, the DIP lenders agreed to a period of twenty-one business days following that particular event of default before automatic stay relief, the debtors’ counsel added. At the end of the applicable period, the debtors’ counsel explained that the stay would be lifted and the DIP lenders could enforce their remedies subject to any required CPUC authorization.
DIP Financing
On the DIP financing, Paul Zumbro of Cravath argued for the debtors, Kristopher Hansen of Stroock & Stroock argued for the DIP agent, Thomas Kreller of Milbank Tweed argued for the the official committee of unsecured creditors, Cecily Dumas of Baker & Hostetler argued on behalf of the tort claimants committee, Sander Esserman of Stutzman Bromberg, and Christopher Hawkins of Sullivan Hill argued for the SLF fire claimants.
In support of the DIP financing, the debtors’ counsel maintained that the provision regarding automatic post-default stay relief is “market” and that the debtors had “negotiated very carefully” the DIP defaults to be “sufficiently flexible.” The debtors’ counsel ultimately argued that there was “a bit of an over-dramatization” of the issue, noting that parties could seek an injunction following a DIP default and before automatic stay relief. In continuing the final DIP hearing, Judge Montali later noted that he was “not comforted” by the potential availability of injunctive relief in those circumstances.
The debtors’ counsel also emphasized the absence of objections to the “core” of the DIP financing, including with respect to the proposed amount or the sufficiency of the marketing process. In responding to certain objection that had been raised, the debtors’ counsel argued that the DIP lenders in these cases have “less control than is typical.” The debtors pointed out that, although the DIP lenders were unwilling to forgo their lien on avoidance actions, the DIP lenders had agreed to seek satisfaction of their claims from other types of collateral before pursuing their lien on the avoidance actions. He also confirmed that the DIP financing does not involve a “roll-up” or “anything that could be considered a disguised roll-up.”
Addressing the “elephant in the room,” the court noted the risk of wildfires in 2019 that could result in “astronomical” administrative priority claims and queried whether those claims might trigger a DIP default somehow. After some discussion, the debtors’ counsel expressed his belief that such claims would not trigger a DIP default. Similarly, the debtors’ counsel added in response to the court’s hypotheticals that he was unaware of any scenario in which the allowance of substantial contribution claims could in itself trigger a DIP default.
During the DIP agent’s arguments in support of the DIP financing, the court highlighted the “enormous leverage” surrounding the applicable loan-to-value ratio. Citing a “cushion as big as you can imagine,” the court said that certain DIP provisions are “not typical for a lot of reasons” in these bankruptcy cases. In discussing the seven-day post-default period before automatic stay relief, the DIP agent’s counsel noted that he has “seen it shorter” and that the DIP lenders would need to engage in discussions with the CPUC before proceeding against the utility assets.
For its part, the UCC’s counsel noted that the UCC would be “happy” for the applicable provision regarding post-default automatic stay relief to be removed, but acknowledged that “at the end of the day, it’s an integrated package and you win some and lose some and there are trade-offs to be made.” The UCC views the DIP financing as “relatively debtor-friendly,” he added.
In opposing the DIP financing, the tort claimants committee took issue with the “cognitive dissonance” reflected by stakeholders “making money left and right” while “there are still people living in tents because of PG&E’s conduct.” Concerning the automatic stay relief provision, the tort claimants committee’s counsel took issue with the court essentially “relinquish[ing] its power upon the occurrence of a termination event.” The provision at issue is “inappropriate” and “unsupportable” given the value of the PG&E debtors to the state of California and its energy market, she said. Noting that PG&E is “too big too fail,” the tort committee indicated its willingness to undertake the risks that would be involved, including that the DIP lenders might seek to re-price the DIP financing, if the court required modification of the post-default automatic stay relief provision.
The tort claimants committee also requested, among other things, that the DIP order be modified to require that CPUC authorization be obtained before the DIP lenders foreclose on utility assets. The debtors later indicated that the DIP lenders had agreed to include language in the final DIP order addressing that issue.
With respect to certain wildfire claimants’ arguments that DIP proceeds should be used to satisfy their prepetition settlements with PG&E, the court expressed sympathy for the claimants’ plight but stressed that it could not grant the requested relief in the context of the DIP motion, leaving those claimants to seek such relief separately as they see fit.
In addressing arguments that the carveout for professional fees should extend to substantial-contribution claimants, the court noted that the DIP lenders would be “far oversecured” and that the issue may be “much ado about nothing” if the estates are solvent.
Public Entities Committee
In denying the motion to appoint a public entities committee, the court looked to the “plain meaning” of Bankruptcy Code sections 101(41) and 1102(b). Judge Montali concluded that he did not have the statutory authority to appoint an official committee consisting of entities that section 101 says are not “persons.” Specifically, Judge Montali noted that section 101(41) of the Bankruptcy Code generally excludes governmental units from the definition of “person,” and that Congress had twice modified the definition of “person” to remove certain limited subsets of governmental units from being excluded. In a colloquy with the UST, which had previously objected to the requested committee appointment, Judge Montali posited that the Bankruptcy Code definition of “person” was the “kiss of death” for the public entities’ position, argued by Esserman of Stutzman Bromberg. Even if he could get beyond the issue of the statutory language, Judge Montali noted that he would still need to address whether the facts of these cases would support a third official committee.
Respective counsel for the debtors and the UCC, both of which opposed the requested relief, made known their objections to the necessity for a third official committee as well. According to Stephen Karotkin of Weil Gotshal for the debtors, there is nothing legally different from the unsecured claims held by these public entities relative to the unsecured claims held by the members of the two existing official committees. Further, these public entities were characterized by the debtors’ counsel as being well-organized and well-coordinated. Karotkin advocated that the appropriate remedy is for these entities to continue to function as an ad hoc group, and to encourage them to later make an application for administrative expense priority for their expenses as a “substantial contribution” under section 503 of the Bankruptcy Code. Kreller of Milbank Tweed, speaking for the UCC similarly framed the issue as whether these entities are adequately represented in their capacity as creditors by the two existing official committees, and asserted that the entities are in fact adequately represented.