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The Wildfire, Hurricane “Value” Play
Vulture funds have discovered natural disasters as a new potent fuel to boost returns.
After a decade of cheap and accessible credit causing strained access to high-yield distressed assets, these investors have turned to wildfires and hurricanes as the trigger for their investment opportunities.
And often, insurers and reinsurers are ready to make a deal with the funds in order to close their claims and limit significant liability.
Most recently, mammoth “value” and “opportunistic” funds like Boston-based Baupost Group bought up equity shares in Pacific Gas and Electric Company (PG&E) following wildfires in California that caused $18 billion in damage and forced the utility to file for Chapter 11 bankruptcy.
As the chart below shows, Baupost gradually increased its shares in PG&E following the 2017 and 2018 fires as the value in the equity declined, betting that the utility would survive and shares rebound in a restructuring.
In another example, shortly after Hurricane Maria hedge funds like GoldenTree Asset Management and Tilden Park Capital Management bought up Puerto Rico’s sales-tax bonds. Following an settlement earlier this year, the funds were were able to exchange their holdings for new notes valued at seven times more than when they purchased them.
Baupost, and its CEO Seth Klarman, has been one of the most aggressive fund in the post disaster strategy.
Besides its equity position, Baupost also purchased $2.5 billion in PG&E wildfire insurance claims, according to the Wall Street Journal, sometimes paying 30 cents to 35 cents on the dollar. The settlement proposed this month between insurers, creditors and PG&E management would price those recovered claims closer to 60 cents on the dollar, doubling Klarman’s stake if the restructuring proposal is confirmed in court.
Baupost Group LLC’s Seth Klarman (source: Wikimedia Commons]
The State of California and Governor Gavin Newsom announced last week that they will fight the settlement, with the attorney for California arguing that the agreement increases the value of Baupost’s investments, limits the insurers’ liability but does not address PG&E’s liability for its part in the wildfires or the true cost to prevent the same issues from reappearing in California.
According to the Wall Street Journal:
Ms. Mitchell said that instead of shoring up its finances and its equipment, PG&E is focused on lining up support for a chapter 11 plan that preserves value for shareholders, in part through the insurance settlement.
In the governor’s view, PG&E’s proposed insurance pact ties up cash and chapter 11 plan votes, and protects shareholders at the expense of the utility’s future.
“This settlement is about leverage. It is not about a debtor who is acting as a fiduciary,” Ms. Mitchell said.
Baupost made a similar play that paid off following Hurricane Maria, buying up more than $925 million in Puerto Rican bonds backed by sales tax revenues, called Cofinas, that it purchased through an alias company called Decagon Holdings. A settlement earlier this year following a hurricane-induced Puerto Rican bankruptcy priced the bonds with the 93% recovery , which may translate into $170 million in profit for its 2015 senior investments alone.
Klarman’s most recent investor letter, which are highly sought after in the hedge fund world, does not discuss wildfires, hurricane or other catastrophes, but it does offer some insight into his thinking into “Black Swan” events like natural disasters.
Since the worst does not frequently happen, you cannot let the fear of a monster storm completely paralyze you.
USGS Releases Updated Seismic Model,
The U.S. Geological Survey released a new seismic hazard map last week that shows increased ground shaking in many locations across the US, and in four urban areas in particular.
The updated map cites the US metropolitan areas of Seattle, San Francisco Bay, greater Los Angeles, and Salt Lake City as being at increased risk given the map’s updated data. According to the report, the new data includes
seismic velocities and depths of sedimentary basins that can be explicitly used to assess the long-period shaking
As a result of the model update, a USGS statement says:
More people live or work in areas of high or moderate seismic hazard than ever before, leading to higher risk of undesirable consequences from future ground shaking. For example, about 1 in 10 people in the U.S. now live in high-hazard areas where strong shaking is likely during their lifetimes. About a third of the population live in places where very strong shaking from rare earthquakes is anticipated. High risk is recognized along the west coast of the U.S., in parts of Nevada and Utah, and in parts of the central and eastern U.S. near Memphis and Charleston.