PG&E Corporation
UPDATE 1: PG&E’s Revised DIP Facility Clarifies Minimum Asset Sale Sweep Threshold; Term Loan Pricing Lowered
Thu 01/31/2019 12:50 PM
UPDATE 1: 12:50 p.m. ET 1/31/2019: As reported, earlier today, the debtors filed a revised proposed order and revised credit agreement and accompanying redlines for the proposed DIP facilities. Notable changes include:
For a complete overview of the terms and provisions of the revised DIP Facility, click HERE.
Original Story 4:41 p.m. UTC on Jan. 30, 2019
DIP Analysis: PG&E’s Proposed DIP Facility Permits $4B of Incremental Debt; Company Has Flexibility to Sell Assets Without Prepaying Term Loans
On Tuesday morning, PG&E Corp. and its utility subsidiary Pacific Gas and Electric Co. commenced chapter 11 cases in the U.S. Bankruptcy Court for the Northern District of California. The debtors are seeking approval of a $5.5 billion DIP facility “to enable it to operate its business in an appropriate and prudent manner through the Final Hearing.”
In this piece, we provide an overview of the key terms and provisions of Pacific Gas’ DIP facility filed as an attachment to the debtors’ postpetition financing motion. We note that the debtors have not received final approval of the motion and will seek interim approval at the first day hearing scheduled for tomorrow, Thursday, Jan. 31.
The DIP facility will be composed of $2 billion of nonamortizing term loans, including a $500 million delayed-draw term loan, and a $3.5 billion revolver; $1.5 billion of revolving commitments will be available prior to the entry of the Final Order, with the remaining revolving commitments and the term loan available after entry.
PG&E will guarantee the DIP facility, and substantially all assets of PG&E and Pacific Gas will secure the obligations.
Although the DIP facility includes an asset sale sweep, Pacific Gas’ prepayment obligations are not clear. While the company is permitted to sell $4 billion of assets without having to repay the term loans, only proceeds in excess of $4 billion that exceed $500 million may be required to be used to prepay the term loans, subject to the company’s right of reinvestment.
The DIP facility is restrictive and does not provide Pacific Gas with significant flexibility to incur additional debt or make restricted payments. Dividends outside of the credit group and prepayments of debt are not permitted under the DIP facility.
However, the DIP facility also permits Pacific Gas to incur $4 billion of incremental loans and make $150 million of general investments; the company can also invest $100 million in certain joint ventures and $50 million in nonguarantor subsidiaries.
As reported, early Tuesday morning, PG&E Corp. (“PG&E”) and its utility subsidiary Pacific Gas and Electric Co. (“Pacific Gas”) commenced their anticipated chapter 11 cases in the U.S. Bankruptcy Court for the Northern District of California. According to the debtors, the bankruptcy was “necessitated by a confluence of factors resulting from the catastrophic and tragic wildfires that occurred in Northern California in 2017 and 2018, and PG&E’s potential liabilities arising therefrom.” Minutes after its bankruptcy filing, shareholder BlueMountain continued its campaign against what the alternative asset management firm describes as a “reckless and irresponsible” chapter 11 that “will harm all stakeholders.”
As expected, the debtors are seeking approval of $5.5 billion of debtor-in-possession financing (the “DIP Facility”) comprising (i) a DIP revolving credit facility with aggregate commitments of $3.5 billion, including a DIP letter of credit subfacility in an aggregate amount of $1.5 billion; (ii) a DIP term loan facility in an aggregate principal amount of $1.5 billion; and (iii) a DIP delayed-draw term loan facility in an aggregate principal amount of $500 million. The borrower under the DIP is Pacific Gas and the DIP is guaranteed by PG&E and its subsidiaries that become a party to the DIP facility.
The debtors are seeking interim DIP approval of $1.5 billion to be made available under the DIP revolving credit facility, which is the amount that “PG&E and its advisors have determined that PG&E will need to access … to enable it to operate its business in an appropriate and prudent manner through the Final Hearing.” According to the DIP motion, the DIP facilities “also provide the Debtors the flexibility to obtain up to an additional $4.0 billion in incremental term loan and/or revolving commitments, subject to further approval by the Court and satisfaction or waiver of customary conditions” (emphasis added).
In this piece, we provide an overview of the key terms and provisions of Pacific Gas’ DIP Facility.
As mentioned above, the DIP Facility will be composed of $2 billion of nonamortizing term loans, including a $500 million delayed-draw term loan, and a $3.5 billion revolver.
About $1.5 billion of revolving commitments will be available prior to the entry of the Final Order, with the remaining revolving commitments and the term loan available after entry. The delayed-draw term loan will be available for 365 days after the allocation of the term loan and, significantly, after the entry of the Final Order, Pacific Gas is not permitted to draw on the revolver until the delayed-draw term loan commitments have been reduced to zero.
PG&E will guarantee the DIP Facility, and substantially all assets of PG&E and Pacific Gas will secure the obligations.
Under the DIP Facility, “Guarantors” is defined as:
The DIP Facility requires that any subsidiary of PG&E that becomes a debtor or a debtor-in-possession in the cases enter into a Guarantee Joinder.
The DIP Facility also requires each loan party to generally pledge all of their assets to secure the obligations under the DIP Facility, including a pledge of all real property, personal property, general intangibles and intellectual property.
As such, to the extent none of PG&E’s other subsidiaries become debtors in the cases, the DIP Facility will only be secured by substantially all assets of PG&E and Pacific Gas but not any assets of any of PG&E’s other subsidiaries illustrated in the company’s organizational chart below.
As illustrated below, the DIP Facility requires Pacific Gas to apply proceeds from any Prepayment Event in excess of $500 million to repay the term loan. The definition “Prepayment Event” is any nonordinary course disposition resulting in proceeds in excess of $4 billion.
The threshold amount of proceeds after which Pacific Gas is required to prepay the term loans is unclear.
In his Declaration in Support of Motion for DIP Financing, David Kurtz of Lazard described the prepayment obligations as so:
In an overview of the DIP Facility included in the DIP motion, however, the company described its prepayment obligations as:
Whereas Kurtz’s description implies that a Prepayment Event yielding proceeds of $4.1 billion could require Pacific Gas to apply $100 million of proceeds to prepay the term loan (subject to its reinvestment right), the company’s description notes that it will only be obligated to prepay the term loans once it has received proceeds of at least $4.5 billion.
Finally, the DIP Facility provides that:
Based on the drafting, another interpretation could permit net proceeds to be excluded from prepayment requirements for each transaction under $500 million (but then if such amount is ever exceeded, all previous amounts withheld in such a manner may need to be repaid). Given that this would seem to contradict the quotes above, this may be an unlikely interpretation.
As illustrated in the table below, other than permitting $4 billion of incremental debt, the DIP Facility is restrictive and does not provide Pacific Gas with significant flexibility to incur additional debt or make restricted payments.
Dividends outside of the credit group and prepayments of debt are not permitted under the DIP Facility.
Debt and Liens - The DIP Facility permits Pacific Gas to incur $4 billion of incremental term loans or revolving commitments under the DIP Facility; initial term loan lenders will have 50-bps MFN protection for 450 days if Pacific Gas incurs incremental term loans. The administrative agent must consent to any new lenders that provide incremental financing.
The DIP Facility also includes a $150 million general debt basket and a $25 million general liens basket.
Investments - Pacific Gas is permitted to make $150 million of general investments, $100 million of investments in certain joint ventures and $50 million of investments in nonguarantor subsidiaries. Investments to nonguarantor subsidiaries will permit value to be transferred away from creditors.
- Clarification that a $500 million minimum prepayment amount applies to prepayment events in the aggregate rather than with respect to each prepayment event;
- Pricing on the term loan was reduced 25 bps to L+ 2.25% (which is the same as the revolver);
- The delayed draw unused fee rate was reduced; and
- A requirement that the companies provide the agent with a list of their owned or leased real property in excess of $5 million, including any such after-acquired property.
For a complete overview of the terms and provisions of the revised DIP Facility, click HERE.
Original Story 4:41 p.m. UTC on Jan. 30, 2019
DIP Analysis: PG&E’s Proposed DIP Facility Permits $4B of Incremental Debt; Company Has Flexibility to Sell Assets Without Prepaying Term Loans
Executive Summary
On Tuesday morning, PG&E Corp. and its utility subsidiary Pacific Gas and Electric Co. commenced chapter 11 cases in the U.S. Bankruptcy Court for the Northern District of California. The debtors are seeking approval of a $5.5 billion DIP facility “to enable it to operate its business in an appropriate and prudent manner through the Final Hearing.”
In this piece, we provide an overview of the key terms and provisions of Pacific Gas’ DIP facility filed as an attachment to the debtors’ postpetition financing motion. We note that the debtors have not received final approval of the motion and will seek interim approval at the first day hearing scheduled for tomorrow, Thursday, Jan. 31.
The DIP facility will be composed of $2 billion of nonamortizing term loans, including a $500 million delayed-draw term loan, and a $3.5 billion revolver; $1.5 billion of revolving commitments will be available prior to the entry of the Final Order, with the remaining revolving commitments and the term loan available after entry.
PG&E will guarantee the DIP facility, and substantially all assets of PG&E and Pacific Gas will secure the obligations.
Although the DIP facility includes an asset sale sweep, Pacific Gas’ prepayment obligations are not clear. While the company is permitted to sell $4 billion of assets without having to repay the term loans, only proceeds in excess of $4 billion that exceed $500 million may be required to be used to prepay the term loans, subject to the company’s right of reinvestment.
The DIP facility is restrictive and does not provide Pacific Gas with significant flexibility to incur additional debt or make restricted payments. Dividends outside of the credit group and prepayments of debt are not permitted under the DIP facility.
However, the DIP facility also permits Pacific Gas to incur $4 billion of incremental loans and make $150 million of general investments; the company can also invest $100 million in certain joint ventures and $50 million in nonguarantor subsidiaries.
Background
As reported, early Tuesday morning, PG&E Corp. (“PG&E”) and its utility subsidiary Pacific Gas and Electric Co. (“Pacific Gas”) commenced their anticipated chapter 11 cases in the U.S. Bankruptcy Court for the Northern District of California. According to the debtors, the bankruptcy was “necessitated by a confluence of factors resulting from the catastrophic and tragic wildfires that occurred in Northern California in 2017 and 2018, and PG&E’s potential liabilities arising therefrom.” Minutes after its bankruptcy filing, shareholder BlueMountain continued its campaign against what the alternative asset management firm describes as a “reckless and irresponsible” chapter 11 that “will harm all stakeholders.”
As expected, the debtors are seeking approval of $5.5 billion of debtor-in-possession financing (the “DIP Facility”) comprising (i) a DIP revolving credit facility with aggregate commitments of $3.5 billion, including a DIP letter of credit subfacility in an aggregate amount of $1.5 billion; (ii) a DIP term loan facility in an aggregate principal amount of $1.5 billion; and (iii) a DIP delayed-draw term loan facility in an aggregate principal amount of $500 million. The borrower under the DIP is Pacific Gas and the DIP is guaranteed by PG&E and its subsidiaries that become a party to the DIP facility.
The debtors are seeking interim DIP approval of $1.5 billion to be made available under the DIP revolving credit facility, which is the amount that “PG&E and its advisors have determined that PG&E will need to access … to enable it to operate its business in an appropriate and prudent manner through the Final Hearing.” According to the DIP motion, the DIP facilities “also provide the Debtors the flexibility to obtain up to an additional $4.0 billion in incremental term loan and/or revolving commitments, subject to further approval by the Court and satisfaction or waiver of customary conditions” (emphasis added).
In this piece, we provide an overview of the key terms and provisions of Pacific Gas’ DIP Facility.
Basic Terms
As mentioned above, the DIP Facility will be composed of $2 billion of nonamortizing term loans, including a $500 million delayed-draw term loan, and a $3.5 billion revolver.
About $1.5 billion of revolving commitments will be available prior to the entry of the Final Order, with the remaining revolving commitments and the term loan available after entry. The delayed-draw term loan will be available for 365 days after the allocation of the term loan and, significantly, after the entry of the Final Order, Pacific Gas is not permitted to draw on the revolver until the delayed-draw term loan commitments have been reduced to zero.
PG&E will guarantee the DIP Facility, and substantially all assets of PG&E and Pacific Gas will secure the obligations.
Under the DIP Facility, “Guarantors” is defined as:
“[PG&E], together with any Subsidiary of [PG&E] or [Pacific Gas] that, on or after the Closing Date, executes a Guarantor Joinder.”
The DIP Facility requires that any subsidiary of PG&E that becomes a debtor or a debtor-in-possession in the cases enter into a Guarantee Joinder.
The DIP Facility also requires each loan party to generally pledge all of their assets to secure the obligations under the DIP Facility, including a pledge of all real property, personal property, general intangibles and intellectual property.
As such, to the extent none of PG&E’s other subsidiaries become debtors in the cases, the DIP Facility will only be secured by substantially all assets of PG&E and Pacific Gas but not any assets of any of PG&E’s other subsidiaries illustrated in the company’s organizational chart below.
As illustrated below, the DIP Facility requires Pacific Gas to apply proceeds from any Prepayment Event in excess of $500 million to repay the term loan. The definition “Prepayment Event” is any nonordinary course disposition resulting in proceeds in excess of $4 billion.
The threshold amount of proceeds after which Pacific Gas is required to prepay the term loans is unclear.
In his Declaration in Support of Motion for DIP Financing, David Kurtz of Lazard described the prepayment obligations as so:
“The DIP Facility also provides flexibility to PG&E to use $4 billion of asset sale and condemnation proceeds for general corporate purposes; for any proceeds above the $4 billion carve-out, the Company maintains a reinvestment right of 180 days, subject to a further 180 day extension, thereby providing significant flexibility to PG&E to finance its business.”
In an overview of the DIP Facility included in the DIP motion, however, the company described its prepayment obligations as:
“Net cash proceeds from (i) non-ordinary course asset sales and condemnation events required to be used to prepay term loans, subject to the ability to reinvest proceeds in the business within 360 days of receipt in lieu of making such prepayment, provided that (1) the first $4.0 billion of proceeds not so reinvested shall not be required to be used to prepay term loans and (2) thereafter, proceeds not so reinvested shall only be required to be used to prepay term loans once such proceeds are in excess of $500 million or (ii) incurrence by PG&E Corp. or any of its subsidiaries of indebtedness that is not permitted to be incurred under the DIP Credit Agreement.”
Whereas Kurtz’s description implies that a Prepayment Event yielding proceeds of $4.1 billion could require Pacific Gas to apply $100 million of proceeds to prepay the term loan (subject to its reinvestment right), the company’s description notes that it will only be obligated to prepay the term loans once it has received proceeds of at least $4.5 billion.
Finally, the DIP Facility provides that:
“no prepayment shall be required pursuant to this paragraph unless the amount of such Net Proceeds received in respect of such event and not applied pursuant to the preceding proviso exceeds $500,000,000, at which point all such Net Proceeds that have otherwise not been applied pursuant to this Section 2.6(b) shall be used to prepay the Term Loans” (emphasis added).
Based on the drafting, another interpretation could permit net proceeds to be excluded from prepayment requirements for each transaction under $500 million (but then if such amount is ever exceeded, all previous amounts withheld in such a manner may need to be repaid). Given that this would seem to contradict the quotes above, this may be an unlikely interpretation.
Negative Covenants
As illustrated in the table below, other than permitting $4 billion of incremental debt, the DIP Facility is restrictive and does not provide Pacific Gas with significant flexibility to incur additional debt or make restricted payments.
Dividends outside of the credit group and prepayments of debt are not permitted under the DIP Facility.
Debt and Liens - The DIP Facility permits Pacific Gas to incur $4 billion of incremental term loans or revolving commitments under the DIP Facility; initial term loan lenders will have 50-bps MFN protection for 450 days if Pacific Gas incurs incremental term loans. The administrative agent must consent to any new lenders that provide incremental financing.
The DIP Facility also includes a $150 million general debt basket and a $25 million general liens basket.
Investments - Pacific Gas is permitted to make $150 million of general investments, $100 million of investments in certain joint ventures and $50 million of investments in nonguarantor subsidiaries. Investments to nonguarantor subsidiaries will permit value to be transferred away from creditors.
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