Bloomberg News and American Banker
NEW YORK - Bank of America Corp., Deutsche Bank AG, J.P. Morgan Chase & Co., and five other banking companies could lose more than $1 billion because they have letters of credit backing Pacific Gas and Electric Corp.'s bonds.
Interest payments on seven of eight bonds - totaling $907 million, sold by the California Pollution Control Authority on behalf of PG&E, and backed by the banking companies' letters of credit - were due Thursday; the eighth falls due on Feb. 1. PG&E defaulted on maturing commercial paper last week.
Toronto-Dominion Bank, ABN Amro Bank NV, KBC Bank NV, and BNP Paribas SA also provided letters of credit on PG&E's bonds.
With a letter of credit, the bank substitutes its own credit for that of the borrower and collects a fee based on the size of the bond issue. The borrower pays lower interest rates based on the bank's creditworthiness.
However, on Thursday a source at one of the banking companies, who requested anonymity, said that several institutions may have already mitigated their risk.
A spokesman for Bank of America said the company is working with the utility and expects to get payments, none of which are due before Feb. 1.
