Seth Klarman’s PG&E bet

Seth Klarman first bought California-based utility provider PG&E (PCG) in Q1 2018. According to 13F filings, almost all the top institutional investors increased their holdings in PG&E during the fourth quarter. PG&E fell almost 50% in Q4 after the “Camp Fire,” the deadliest wildfire in California history, started in November. Among the notable additions, the Vanguard Group added ~9.6 million shares, while Anchorage Capital Group bought net 9.5 million shares of PG&E in Q4.

Why Seth Klarman’s PG&E Bet Is Not as Ill-Timed as It Might Seem

On January 29, wildfire-stricken PG&E filed for voluntary Chapter 11 bankruptcy protection. The utility faces ~$30 billion in potential liabilities associated with wildfires in 2017 and 2018.

PG&E’s bankruptcy proceedings

On January 29, BlueMountain Capital Management said that it’s deeply disappointed that PG&E’s board ignored calls from multiple parties to abandon its reckless and irresponsible plan to file for bankruptcy.

PG&E stock has rallied almost 40% since it filed for bankruptcy protection on January 29, while it is down 35% year-to-date. As compared to the stock, broader utilities (XLU) are up 5% in the same period, still lower than the gains of S&P 500 (SPY) and the Dow Jones Industrial Average Index (DIA), which have gained 11.4% and 11.3%, respectively, in the same period.

Klarman’s offsetting insurance claims

During the fourth quarter, Klarman sold 18% of his shares in PG&E. In the third quarter, Baupost had bought 14.5 million shares of PG&E. This was before the wildfires had started in California in November. Therefore, the value of his investment is expected to have declined a lot. However, there is one catch. Klarman had also bought insurance claims of $1 billion against his PG&E bet, according to Bloomberg news. This move gives Baupost the right to recover losses incurred from wildfires in 2017. Moreover, the insurance claims could also act as a hedge against losses suffered by holding PG&E’s stock. These claims would be eligible for repayment under a bankruptcy proceeding.

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