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Non-Tech : The Enron Scandal - Unmoderated -- Ignore unavailable to you. Want to Upgrade?

To: greenspirit who wrote (383)	1/17/2002 7:04:57 PM
From: greenspirit	Respond to of 3602

Citigroup's Move to Change Its Enron Debt From Unsecured to Secured Sparks Outcry WSJ When Enron Corp. turned to its bankers for money in late October, the energy company needed a quick, big loan to restore investor confidence in its finances. Citigroup Inc. came up with the cash -- but with a catch. Enron owed Citigroup $250 million in unsecured debt that was coming due in early December, just one portion of the overall debt Enron owes the bank. So Citigroup told Enron it would provide $600 million of a new $1 billion secured loan -- as long as $250 million was used to pay back existing Citigroup debt, according to people familiar with the transaction. Now, a number of bankers in the lending syndicate are crying foul. Citigroup, they say, used its influence as a new secured lender to improve the standing of unsecured loans it had already extended at the expense of other lenders. The bankers say they discovered only later that part of the loan facility was used to prop up a Citigroup debt position. Thus, the bankers are likely to challenge Citigroup's arrangement as part of Enron's bankruptcy filing in a New York bankruptcy court. Few can blame Citigroup for trying to reduce its exposure to Enron. But some analysts say the maneuver raises questions about whether Citigroup moved unfairly to grab assets. And the deal effectively reduced the pool of collateral available to all of Enron's other creditors in the bankruptcy proceedings. "There's a bit of a conflict there," says Andy Collins, an analyst with U.S. Bancorp Piper Jaffray. Citigroup declined to comment. At a minimum, the controversy over the Citigroup financing underscores how contentious Enron's bankruptcy process could become as numerous creditors fight to secure a piece of a shrinking asset pie. In addition, it raises still more questions about the multiple hats worn by large lenders such as Citigroup, and the conflicts that may create with Enron's other creditors. For Enron, the demand was a disappointment. While Enron trumpeted $1 billion in fresh financing to the investing public, it actually received only $750 million in new money, less than it had wanted, according to several people involved in the financing. Enron Chief Financial Officer Jeffrey McMahon has been telling other creditors that Enron needed cash so badly that Enron had no choice but to go through with the deal. Mr. McMahon was unavailable to comment, but an Enron spokeswoman says, "We got the best deal we could at the time." The arrangement was driven by the fact that the $250 million debt in question, linked to financing for a natural-gas transaction, was soon to come due, according to a banker familiar with Citigroup's strategy. J.P. Morgan Chase & Co., which contributed the remaining $400 million to the $1 billion credit line, also had hundreds of millions of dollars in existing unsecured exposure to Enron. Unlike Citigroup, it made no demands that its own existing loans be rolled into the new credit facility. An official at J.P. Morgan declined to comment. The incident sheds some light on the inner workings of Citigroup in the Enron mess. J.P. Morgan has disclosed it is owed some $2.6 billion in Enron-related exposure. But Citigroup has kept quiet on the subject. Analysts have said it was at least $1 billion, but warn the number could be higher. "Citigroup's disclosure has been lagging," says Mr. Collins. In most bankruptcy cases, unsecured creditors examine all loans extended before the filing to see whether the collateral was granted properly. If an unsecured debt was paid off, or turned into a secured debt, within 90 days of a bankruptcy, that lender is sometimes accused of receiving a "preference" over other lenders. Because such "preferences" clash with a basic aim of bankruptcy law -- to stop a race to the courthouse by treating all similarly situated creditors the same -- they can be challenged in court. A potential challenge by some creditors against Citigroup, in essence, would be that the bank improved its standing in the line of creditors by demanding new collateral on the $250 million of unsecured debt, thereby taking away from other creditors assets that might be available pro rata to other unsecured creditors. Such challenges are often mounted late in the bankruptcy process, when creditors are hashing out how to allocate assets that have been assigned to creditors. If the Citigroup financing is successfully challenged, the $250 million claim would once again become unsecured, freeing up the collateral for the potential pool of assets to be divvied up by unsecured creditors.