WSJ/Major Business News: Enron's Financial Woes Ripple Out Across Asia
November 30, 2001
By JASON BOOTH, HENNY SENDER and RICHARD B. SCHMITT
Staff Reporters of THE WALL STREET JOURNAL
The sudden deep financial troubles of U.S. energy giant Enron Corp. sent ripples of concern across Asia, damaging investments in Japan and potentially undermining businesses in South Korea and Australia.
The uncertainty for Asia is likely just beginning. If Enron files for protection under Chapter 11 of the federal Bankruptcy Code in the U.S., as many investors and financial experts now expect, it is likely to be one of the messiest, most complex bankruptcy cases ever, lawyers say. That is because of the multifaceted nature of Enron's once highflying operations, which combined a global energy business with a massive financial-trading operation involving tens of billions of dollars in complex contracts. A filing by Enron, with about $13 billion in debt, would rank among the largest bankruptcy filings ever. Enron has about 800 trading partners or creditors.
The scale of the Enron collapse is huge, experts say. "There is nothing to compare it to," said Edward Tillinghast, a bankruptcy specialist with Coudert Brothers in New York. "The business was so large. There were so many different kinds of operating entities under the Enron umbrella."
On Wednesday, as the last-ditch merger with Dynegy Inc. unraveled, the company's credit was downgraded to "junk" status by rating agency Standard & Poor's Corp. The stock market, signaling that a bankruptcy filing is expected, hammered Enron stock, which was halted for a time on Wednesday, and knocked lower some of its financial backers' shares. Enron shares closed at 4 p.m. in New York Stock Exchange composite trading at 61 cents, down $3.50, or 85%. Thursday morning in New York, Enron was trading down 33%, or 20 cents, to 41 cents. On Wednesday, Enron bonds also fell sharply, dropping to 50 cents on the dollar from around 55 cents, reflecting concerns over how much creditors might receive if the company does seek bankruptcy-court protection.
Enron spokeswoman Karen Denne said the company is exploring its options and wouldn't comment on whether it has retained bankruptcy counsel.
The fallout in Asia was felt immediately on Thursday. The biggest news was in Sydney, where Enron Australia said it was suspending operations pending further developments regarding its U.S. parent. "We are now waiting for clarification about Enron's situation globally and will advise the local market once we have received that advice," legal counsel Rob McGrory said.
The announcement followed a warning by Standard & Poor's about counterparty exposure in the Australian electricity market, citing the overnight downgrade of Enron. "The recent developments with Enron serve as a further example of the credit risks faced by energy market participants as they seek to manage their market risks in Australia's volatile power market," said Laurie Conheady, an associate director at Standard & Poor's.
Similarly, Enron's presence in South Korea appears to be nearing an end. According to officials at SK Corp., Enron plans to sell its 50% stake in joint venture energy distribution firm SK-Enron Co. SK-Enron was formed in 1999, and controls about 25% of South Korea's natural-gas market, according to the firm's Web site.
Analysts said that Enron had offered to sell its stake to SK Corp., yet the Korean partner said it has no plans to buy the shares. "We already hold 50% ... we don't need the rest," said a company spokesman, Daniel Youn.
Enron was also considered a potential buyer of power generation assets from South Korean government-controlled Korea Electric Power Corp. Kepco is looking to sell assets as past of a wider privatization drive.
Pressure elsewhere in the region was felt primarily in the financial markets. In Tokyo, the value of money management funds Nikko Asset Management Co., UFJ Partners Asset Management Co., Japan Investment Trust Management Co. and Sumisei Global Investment Trust Management Co., fell due to their exposure to Enron debt, which amounted to about 40 billion yen ($324.9 million). Enron news also sparked volatility in the copper and U.S. dollar market, according to traders.
Other financial backers of Enron were negatively effected as well. J.P. Morgan Chase and Citigroup, which have invested hundreds of millions of dollars in hopes of keeping the Enron-Dynegy deal alive, saw their stocks fall on Wednesday trading in the U.S. On Thursday morning Citigroup shares posted slight gains, rising 19 cents to $47.99, while J.P. Morgan Chase shares were flat at $37.50. J.P. Morgan Chase said in a statement it has about $500 million of unsecured exposure to Enron entities, including loans, letters of credit and derivatives. It said it also has secured exposures, including $400 million in loans secured by Enron pipelines.
Besides banks and bondholders, dozens of companies, municipalities and utilities in the U.S. that had signed multiyear power contracts with Enron may be left in the lurch. Over the years, the likes of retailer J.C. Penney Co., and shopping-mall company Simon Property Group signed on with Enron, as it undercut local utilities in newly deregulated markets.
-- Rebecca Smith and Robin Sidel contributed to this article.
Write to Jason Booth at jason.booth@awsj.com1, Henny Sender at henny.sender@wsj.com2 and Richard B. Schmitt at rick.schmitt@wsj.com3.
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