Distressed debt as arbitrage? The legal and financial dimensions of infrastructure and bankruptcy

Keywords: distressed debt, finance, arbitrage, leverage, energy, infrastructure, electricity, utilities
Session Type: Virtual Paper Abstract
Day: Monday
Session Start / End Time: 2/28/2022 05:20 PM (Eastern Time (US & Canada)) - 2/28/2022 06:40 PM (Eastern Time (US & Canada))
Room: Virtual 64

Abstract

Both distressed debt and infrastructure have emerged in recent decades as attractive “alternative” asset classes that are perceived as impervious to broader market trends and valuable ways to diversify financial portfolios. This paper provides an account of the recent bankruptcy of Pacific Gas & Electric (PG&E) – the largest investor-owned electric utility in the United States – to explore the intertwined legal and financial strategies of firms seeking exposure to these asset types. Facing potentially unprecedented liabilities associated with a series of catastrophic wildfires across its service area, PG&E entered a complex restructuring process at the beginning of 2019. Many hedge funds and other financial firms became involved in its bankruptcy proceedings after acquiring the company’s distressed debt and equity on secondary markets. In this rarefied world of “activist investing,” courtrooms function as spaces of financial accumulation. While much of the critical literature on infrastructure investment has usefully represented it as a kind of “rent-seeking,” I argue that this rent-oriented view can be supplemented by expanding the financial concepts of “leverage” and “arbitrage” to foreground questions of risk and power at the intersection of finance and the law. Bankruptcy courts, which simultaneously police the boundaries between law and markets and enable privileged firms to continually transgress those boundaries, can create “arbitrage” opportunities for distressed asset investors. Inside the courtroom, success depends on an entity’s ability to “leverage” its position in relation to an unfolding legal event.