ENE-- Enron avoids junk status, but observers wonder how
By Jonathan Stempel
Friday November 23, 3:38 pm Eastern Time
NEW YORK, Nov 23 (Reuters) - It is rare that holding onto investment-grade credit ratings means as much to a company as it does now to beleaguered energy trader Enron Corp. (NYSE:ENE - news), and some observers are wondering why a cut to junk status is taking so long.
``The sum of all knowledge is in the valuation of the stock and the bonds,'' said Scott Smith, a principal at Wells Capital Management in San Francisco, where he invests $6 billion in debt, and does not own Enron. ``A bond trading in the 50s has nothing to do with an investment-grade security.''
Enron's 6.4 percent notes maturing in 2006 and 6.75 percent notes were bid Friday at 57 cents on the dollar, down from a respective 62 and 60 cents on Wednesday, a trader said. The notes yield to maturity 21.5 percent and 17 percent.
Meanwhile, Enron's shares have sunk 94 percent this year. Since October 16, when it released third-quarter results, which it has since revised downward, its shares have fallen 86 percent, and its bonds by nearly half.
Houston-based Enron, which is trying to merge with smaller cross-town rival Dynegy Inc. (NYSE:DYN - news), has been rocked this year by accounting problems, earnings restatements, a federal investigation and a top management shuffle.
Its advisers were expected this weekend to pore over the company's books, which could lead to a renegotiation of the merger, sources familiar with the matter said.
Moody's Investors Service and Standard & Poor's have cut its senior unsecured debt ratings twice in the last month to their current ``Baa3'' and ``BBB-minus,'' their lowest investment grades. Fitch has cut its equivalent rating to ``BBB-minus,'' and all three agencies have warned of more possible cuts.
The stakes could hardly be higher.
CASH CRUNCH
A downgrade to ``junk'' status could imperil Enron's trading business, force it to pay off as much as $3.9 billion of debt issued mostly by two trusts, and possibly force it to seek bankruptcy protection, analysts said.
Enron said in a securities filing it recently had less than $2 billion of available cash and credit lines.
S&P said on Tuesday that Enron faces ``liquidity issues,'' but enjoys an ``alignment of interests'' with its banks and a near-term financial position that ``is expected to be sufficient'' to allow the Dynegy merger.
Fitch, meanwhile, said on Wednesday that ``our present 'BBB-minus' rating rests on the merger possibility and continued support of the lending banks.''
If Dynegy walks away, it said, ``Enron's credit situation seems untenable with a bankruptcy filing highly possible.''
Enron said on Monday it had $9.15 billion of obligations due through next year, and a $690 million note that could come due next Tuesday. It later said it got a three-week reprieve.
INVESTMENT BANKS
Sean Egan, managing director of Egan-Jones Ratings Co. in Philadelphia, likened Enron's ratings situation to those of California's two largest utilities, Pacific Gas & Electric Co. (NYSE:PCG - news) and Southern California Edison (NYSE:EIX - news).
Despite investor unease, those utilities kept their investment-grade ratings only until they defaulted on debt in January, as California's power crisis worsened.
On November 8, a day before the Dynegy merger was announced, senior officials from Enron's lead banks -- William Harrison, chief executive of J.P. Morgan Chase & Co. (NYSE:JPM - news), and Michael Carpenter, who runs Citigroup Inc.'s (NYSE:C - news) investment banking arm -- met with Moody's to help allay that agency's concerns, a person familiar with the meeting said.
A day later, Moody's, which issued no statement on Enron this week, downgraded the company's senior unsecured debt rating, but only to its current ``Baa3.''
``Pressure is coming from the investment banks, which have a vested interest in seeing the Dynegy deal go through,'' said Egan, whose agency rates Enron's debt ``BB,'' its second-highest junk grade. ``Investment banking fees will be substantial.''
Companies pay for Moody's and S&P ratings, which they need to obtain financing. Egan said his agency receives no such payments.
Citigroup and J.P. Morgan declined to comment. Moody's and S&P did not immediately return phone calls. Fitch was not immediately available for comment. Dynegy and Enron on Wednesday, however, reaffirmed their commitment to the merger.
Wells Capital's Smith isn't sure what to expect.
``Enron will remain definitively investment grade if the merger as billed goes through, ... but there are half a dozen things that could go wrong,'' he said. ``Obviously, the equity markets are telling you it's very skeptical the merger will go through, and the bond market is following its lead.''
(Additional reporting by Carolyn Koo and Arindam Nag.) |
