(Reuters) - Hedge funds led by the Baupost Group LLC are poised to score a $170 million profit in less than three months from a bet tied to Toshiba Corp’s bankrupt nuclear unit Westinghouse Electric Corp, according to three people familiar with the matter.
Baupost and GSO Capital Partners LP, the credit arm of private equity firm Blackstone Group LP, in September bought at a discount claims South Carolina utilities had against Toshiba stemming from nuclear projects Westinghouse failed to finish. The funds expected to be repaid over five years.
But Toshiba on Tuesday secured roughly $5 billion in financing, which the Japanese company has said it will use to immediately repay settlements with utilities in South Carolina and Georgia that are stuck with unfinished nuclear power plants.
The shortened time frame for the repayments will boost the expected returns of the group of hedge funds, the sources said. All told, the funds will reap roughly $170 million from the repayment, a roughly 9 percent gain, the sources said.
The funds had bought the $2.2 billion in claims from the South Carolina utilities, SCANA Corp and state-owned Santee Cooper, for 91.5 cents on the dollar.
Reuters reported in October that the Baupost Group had acquired the biggest portion of the settlement, with GSO participating. It could not be determined how much each fund would reap.
GSO, Baupost and Westinghouse declined to comment.
For Baupost, the windfall comes as welcome news for the $31 billion hedge fund at the tail end of a year where its returns are in the low single digits.
With the deal in place, Toshiba, which has been rocked by accounting scandals as well as the financial demise of Westinghouse, is looking to further sever ties with its subsidiary, now up for sale in bankruptcy.
It plans to demand reimbursement from Westinghouse for the payments to the utilities, and then sell the right to be repaid by the nuclear business.
By buying the settlement this fall, the hedge funds had bet that Toshiba would stay solvent until it completed the payments in 2022.
The funds’ profits come at the expense of SCANA and Santee Cooper, the utilities that own the failed V.C. Summer project in South Carolina, which lost the $170 million by selling the claims at a discount.
“It will be an issue with the regulators in terms of the prudence of their decision,” said Todd Shipman, a credit analyst at Standard & Poor’s Global Ratings, of SCANA. “It will be up to (SCANA) to lay out their case (about) why they did what they did and when.”
The utilities have said they sold the settlement to mitigate the risk the Japanese company would not complete the payments.
Along with a parallel Westinghouse nuclear plant in Georgia, the two projects were hailed as the start of U.S. nuclear renaissance.
But after years of delays and billions of dollars of cost overruns at V.C. Summer and the Vogtle project in Georgia, Westinghouse filed for Chapter 11.
After spending $9 billion on construction, SCANA and Santee Cooper abandoned the South Carolina project in July, saying it no longer made economic sense.
A SCANA spokeswoman said the company was not privy to Toshiba’s business discussions when it sold the settlement, and the company wanted to ensure it had funds for the benefit of its customers.
Georgia Power, a unit of Southern Co that is leading the Vogtle project, held onto its settlement. On Tuesday, it said that Toshiba would pay the remainder of its $3.68 billion guarantee settlement by Dec. 15. Those payments were originally agreed to run through 2021.
Georgia Power has said it intends to complete the Vogtle project.
Reporting by Tom Hals in Wilmington, Delaware and Jessica DiNapoli in New York; additional reporting by Svea Herbst-Bayliss; Editing by Noeleen Walder and Lisa Shumaker