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Date: Sat, 27 Oct 2001 09:13:59 -0700 (PDT)

Enron taps credit line; stock slides

10/27/2001
Associated Press Newswires 
Copyright 2001. The Associated Press. All Rights Reserved. 

HOUSTON (AP) - After Enron Corp. tapped into more than $3 billion in credit in an effort to boost confidence of investors and customers, stock prices dropped. 

Enron Corp.'s stock price hit its lowest point in more than five years Friday. Shares fell 95 cents on Friday to $15.40, a level not seen since 1995, as analysts continued to muddle through a complicated series of bookkeeping issues revealed after the company's earnings announcement earlier this month.

The stock is down more than 50 percent in two weeks, and the company lost almost $14 billion in market value. 

Late this week the company decided to convert $3 billion in revolving credit it has through various banks into cash. The company put about $1.1 billion in the bank in an effort to reassure business partners and investors of its liquidity and is using the $2.2 billion balance to begin an orderly repurchase of a certain kind of short-term corporate IOU known as commercial paper. 

"Nothing spells confidence quite like cash, which is what we want investors to understand," said Enron spokesman Mark Palmer of the $1.1 billion banked this week. 

Palmer could neither confirm nor deny that the company is negotiating further lines of credit with banks but described such actions as "good management decisions." 

On Oct. 16 Enron's third-quarter earnings release drew renewed attention to an issue investors and analysts had previously been unhappy about: Then-Chief Financial Officer Andrew Fastow, with the Enron board's approval, had formed and run two investment partnerships that could have created a conflict of interest. 

The partnerships, LJM Cayman and LJM2 Co-Investment, did complex financing and hedging deals with Enron. 

Fastow had resigned from his roles in the partnerships months ago when Wall Street began to question whether he could watch out for the interests of Enron's shareholders and the investment partnership simultaneously. But last week when the company reported a $35 million loss related to ending its LJM ties as well as a $1.2 billion reduction in shareholder equity, new questions began to arise. 

The Securities and Exchange Commission's Division of Enforcement launched an informal inquiry into the partnerships, and earlier this week Fastow was put on a leave of absence. 

Reducing the company's debt exposure through commercial paper and putting it back into more traditional financial tools, like a revolving line of credit, could give great peace of mind to Enron's investors, said Anatol Feygin, an analyst with J.P. Morgan. 

"It helps them shore up their support behind their energy trading business, which is really the core of their operations," Feygin told the Houston Chronicle for Saturday's editions. 

Carol Coale, an analyst with Prudential Securities, still sees the move as somewhat confusing. 

"Just last week they were touting their unused lines of credit as a plus, but the fact that they tapped those now sends a strange, mixed message," she said. "Do they need the cash to keep the rating agencies off their back? Is it a gesture for customers? It first struck me as another one of these strangely timed actions on the part of management."

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BARRON'S: REVIEW & PREVIEW

10/27/2001
Capital Markets Report 
(Copyright (c) 2001, Dow Jones & Company, Inc.) 

Turning Up the Heat: 

Energy trader Enron ousted its chief financial officer days after it said the SEC was conducting an inquiry into billions of dollars of transactions it made with entities tied to the CFO, Andrew S. Fastow. Enron said Fastow took a leave of absence to restore investor confidence. Enron shares have plunged 50% recently, after it announced the probe and reported a $618 million loss. 

BARRON'S: The Trader

10/27/2001
Dow Jones Commodities Service 
(Copyright (c) 2001, Dow Jones & Company, Inc.) 

Bulls Look To Recovery, As Techs Lead The Surge 
By Andrew Barry 

-- In what undoubtedly will become a business-school case study, Enron let potentially containable concerns about some asset writedowns and a formerly obscure group of partnerships mushroom into a full-blown financial crisis last week. 

Enron's stock plunged 10.60 to 15.45, following a 10-point drop in the prior week, and the company's bonds fell sharply as yields rose to junk levels of around 10%. By week's end, Enron had drawn down $3 billion in bank credit lines to pay off nearly $2 billion in maturing commercial paper, leaving it only about $1 billion of net liquidity. 

Enron's big energy trading operation, which accounts for the bulk of the company's profits and most of its equity valuation, now may be vulnerable because it hinges on a solid credit rating and the confidence of trading counterparties. Enron faces potential debt downgrades from the major rating agencies, but the company is likely to remain an investment-grade credit. Moody's Investors Service now rates its debt Baa1, three notches above junk. 

One doomsday scenario is that counterparties on existing Enron trades, concerned about Enron's viability, push for settlement of the trades, precipitating the kind of liquidity crisis that engulfed Long-Term Capital Management in 1998. 

Despite entreaties by friendly Wall Street analysts to come clean about its financial situation, Enron has resisted, refusing to disclose the size of potential liabilities involving Enron-created partnerships whose debt is guaranteed by Enron. 

Enron called a conference call Tuesday to clear the air, but it ended up compounding its problems by failing to answer questions posed by a Boston investor about the Marlin partnership, leaving Wall Street with the clear impression that the company faces a nearly $1 billion loss on that deal. 

Some suspect that Enron stonewalling is motivated by fears that further disclosure will expose the inadequacy of the asset coverage behind its partnerships and thus significant Enron liabilities that will impair the company's credit ratings. There may also be the need for potential writedowns of various Enron assets, including its money-losing broadband business. 

Enron now trades at only a slight premium to its second-quarter book value of $13 a share, but it's worth noting that tangible book, excluding goodwill, was only $9 a share. Book value fell in the third quarter by an undetermined about because of Enron's $1 billion asset writedown and its still-mysterious $1.2 billion reduction in shareholder equity related to one of its partnerships. The third-quarter book value won't be known until Enron releases its balance sheet, which may not occur until its quarterly 10-Q is released. 

The Enron situation is another black eye for Wall Street research. The company was a Street favorite for years because of its strong and consistent profit growth. Enron was able to get away with providing minimal disclosure about its energy trading activities and its partnerships because analysts and investors didn't demand it. The Enron bull case essentially boiled down to the company's leadership in the booming energy trading markets and analysts' confidence in management. The Street really didn't provide much more insight than that into a company that at one point had a $75 billion valuation. That value has since shrunk to $14 billion. 

Enron's woes also show how equity analysts pay too little attention to company balance sheets. Until last week, Enron analysts still were more focused on earnings dilution than the more important issue of Enron's financial health. 

Enron had about $15 billion in debt and preferred stock outstanding at the end of the second quarter and an undetermined amount of guaranteed off-balance-sheet debt. Enron clearly ignored the importance of its balance sheet, allowing it to grow enormously over the past few years. Judging from the company's rather meager credit lines, Enron apparently figured nobody would ever doubt the financial strength of the king of the energy markets. 

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City - Enron directors cash in shares.
By Simon English.

10/27/2001
The Daily Telegraph 
P31
(c) Telegraph Group Limited, London, 2001 

LEADING executives at Enron, the troubled US energy giant, cashed in shares worth more than $100m ( #70m) this year in the run-up to a financial crunch that has left the company's credibility in ruins. 

Research by Thomson Financial shows that Kenneth Lay, chief executive, sold about 400,000 shares this year, netting him more than $25m. He still held 2.8m shares until July.

Other executives made similar sales, a revelation likely to anger investors who have seen the shares fall from $83 at the start of the year to $45 by July. They halved again this week and fell to below $16 yesterday. Enron declined to comment on the share sales. 

Mr Lay said in a statement that he is seeking to "dispel uncertainty in the financial community" by drawing on lines of credit to restore faith in Enron's financial strength. Enron will pay off debts of $2.2 billion and keep another $800,000 in cash. He said: "We know we have our work cut out for us if we are to rebuild our credibility with the investment community." 

The company is facing an inquiry by the Securities & Exchange Commission into partnerships managed by Andrew Fastow, former chief financial officer. 

Mr Fastow was ousted on Wednesday night as part of the company's moves to restore confidence, though Enron insists he has done nothing wrong. 

Enron lost $1 billion in the third quarter on what it has called "failed investments".

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MONEY
Briefcase
BRIEFCASE

10/27/2001
Orlando Sentinel 
METRO
B1
(Copyright 2001 by The Orlando Sentinel) 

ENRON STOCK SINKS TO 5-YEAR LOW 

Energy trading giant Enron Corp., its stocks hammered by a potential credit crunch and its chief financial officer's ouster, fell to its lowest close in more than five years on Friday. The fall was sparked by word of a big quarterly loss and a Securities and Exchange Commission inquiry into the ousted CFO's links to some of Enron's partnerships. Enron stock closed at $15.50, off 85 cents or 5.2 percent, on the New York Stock Exchange. 

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Enron Taps Credit Line; Stock Slides
Tom Fowler

10/27/2001
KRTBN Knight-Ridder Tribune Business News: Houston Chronicle - Texas 
Copyright (C) 2001 KRTBN Knight Ridder Tribune Business News; Source: World Reporter (TM) 

Enron Corp.'s stock price hit its lowest point in more than five years Friday after it tapped into more than $3 billion in revolving credit in an effort to re-assure investors and customers. 

Shares fell 95 cents on Friday to $15.40, a level not seen since 1995, as analysts continued to muddle through a complicated series of bookkeeping issues revealed after the company's earnings announcement earlier this month. The stock is down more than 50 percent in two weeks, and the company lost almost $14 billion in market value.

Late this week the company decided to convert $3 billion in revolving credit it has through various banks into cash. The company put about $1.1 billion in the bank in an effort to reassure business partners and investors of its liquidity and is using the $2.2 billion balance to begin an orderly repurchase of a certain kind of short-term corporate IOU known as commercial paper. 

"Nothing spells confidence quite like cash, which is what we want investors to understand," said Enron spokesman Mark Palmer of the $1.1 billion banked this week. 

Palmer could neither confirm nor deny that the company is negotiating further lines of credit with banks but described such actions as "good management decisions." 

Enron's most recent woes began Oct. 16 when its third-quarter earnings release drew renewed attention to an issue investors and analysts had previously been unhappy about: Then-Chief Financial Officer Andrew Fastow, with the Enron board's approval, had formed and run two investment partnerships that could have created a conflict of interest. 

The partnerships, LJM Cayman and LJM2 Co-Investment, did complex financing and hedging deals with Enron and were formed originally as a way to offset risks associated with some of the company's newer businesses such as broadband trading. 

Fastow had resigned from his roles in the partnerships months ago when Wall Street began to question whether he could watch out for the interests of Enron's shareholders and the investment partnership simultaneously. But last week when the company reported a $35 million loss related to ending its LJM ties as well as a $1.2 billion reduction in shareholder equity, new questions began to arise. 

Analysts began to demand more details behind the workings of the partnerships, details that Enron did not provide as quickly as some would have liked. 

Enron Chief Executive Officer Ken Lay told analysts and investors the company was careful to ensure that the interests of Enron and its shareholders were protected, but The Securities and Exchange Commission's Division of Enforcement launched an informal inquiry into the partnerships, and earlier this week Fastow was put on a leave of absence. 

In drawing down the $3.3 billion line of revolving credit this week, the company put about $1.1 billion in the bank to ensure liquidity and is using the balance to begin an orderly repurchase of its commercial paper. 

Now Enron will begin repurchasing its commercial paper. This is a way for companies to raise money over a short period at rates that are usually slightly better than what banks offer, and often with more flexible terms. 

Investors in commercial paper -- who are actually more like lenders, since it's actually a form of debt -- are often fund managers who often have large sums of extra cash in search of short-term investments. 

The investors like commercial paper because it lets them earn money on cash that would sit idle otherwise and lets them do it through something issued only by companies with top credit ratings and usually backed by bank lines of credit. 

"To some extent, redeeming the commercial paper is at the expense of the capital markets, which look at it negatively," said Anatol Feygin, an analyst with J.P. Morgan. 

But reducing the company's debt exposure through commercial paper and putting it back into more traditional financial tools, like a revolving line of credit, could give great peace of mind to Enron's investors, he said. 

"It helps them shore up their support behind their energy trading business, which is really the core of their operations," Feygin said. 

Carol Coale, an analyst with Prudential Securities, still sees the move as somewhat confusing. 

"Just last week they were touting their unused lines of credit as a plus, but the fact that they tapped those now sends a strange, mixed message," she said. "Do they need the cash to keep the rating agencies off their back? Is it a gesture for customers? It first struck me as another one of these strangely timed actions on the part of management." 

Jeff Dietert, an analyst at Simmons & Co., said Enron management needs to continue to make clear the issues that have investors confused and concerned. 

In a worst-case scenario, investor fears could create a vicious cycle that continues to drive the stock down, which would force bond rating agencies to consider downgrades of Enron. That could lead to lower credit ratings, which would force Enron's energy trading partners to limit their exposure to the company and cut back on business with it. 

"Thus, we see a big incentive for Enron to clarify the issues," Dietert wrote in a report Friday. "Our gut feel is that Enron can pull it off." 

Feygin said he also believes the company will continue to do better in revealing its financial dealings but thinks there may be more surprises in store. 

For example, a Wall Street Journal article Friday discussed for the first time another business entity with ties to Enron known as Chewco. It was formed in 1997 with about $400 million in financial backing to buy interests in unnamed Enron assets. 

Chewco was run by Michael Kopper, a managing director of Enron's Global Equity Markets Group. 

"Frankly, that was the first time I had ever heard of that entity," Feygin said. "Until now, everything that's come out I've at least heard of or had some idea of what they were from the company's filings or discussions. This is something I had never heard of before."

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MONEYSENSE
BUSINESS BRIEFS
BUSINESS BRIEFS
A staff and wire report

10/27/2001
The Tampa Tribune 
FINAL
1
(Copyright 2001) 

Enron Stock Skids 

Enron Corp. bonds and shares fell Friday after the nation's largest energy trader tapped a $3 billion credit line. The company's stock has fallen 54 percent in the past 14 days, and was down again Friday, dropping 95 cents, or 5.8 percent, to $15.40. 

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Business/Financial Desk; Section C
BUSINESS DIGEST

10/27/2001
The New York Times 
Page 1, Column 1
c. 2001 New York Times Company 

Enron Buys Back $3 Billion of Debt 

Enron, trying to reassure investors that it has ample liquidity, began to repurchase all its outstanding commercial paper, using $3.3 billion it had borrowed from banks. [C2.] 

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Business
Daily Briefing
FROM STAFF AND WIRE REPORTS

10/27/2001
The Atlanta Journal - Constitution 
Home
F.2
(Copyright, The Atlanta Journal and Constitution - 2001) 

Enron announces new financial chief 

Houston --- Enron Corp. promoted Jeff McMahon to chief financial officer. Former CFO Andrew Fastow will take a leave of absence, the company said. Enron's share price has dropped six days in a row following an inquiry into partnerships Fastow ran. 

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Business/Financial Desk; Section C
Enron Taps All Its Credit Lines To Buy Back $3.3 Billion of Debt
By FLOYD NORRIS

10/27/2001
The New York Times 
Page 2, Column 5
c. 2001 New York Times Company 

The Enron Corporation, trying to reassure investors that it has ample liquidity, began to repurchase all its outstanding commercial paper yesterday, using $3.3 billion it borrowed from banks by depleting its lines of credit. 

An Enron spokesman said that when the commercial paper repurchases are completed the company will retain more than $1 billion in cash.

The moves did not appear to reassure investors, as Enron's share price fell to another six-year low. Shares traded as low as $15.04 yesterday, before ending the day at $15.40, down 95 cents. 

The move will raise the interest expense for the company, because banks normally charge more than companies have to pay in the commercial paper market, and because its outstanding debt will rise by the additional $1 billion. 

Enron's debt is rated investment grade. But its bonds now trade below investment grade levels, although not so low that it appears investors fear an early default. But with the bonds trading so low, it is unlikely Enron will be able to sell more commercial paper. 

Enron's stock has been plunging since Oct. 17, shortly after it disclosed that its third-quarter balance sheet, which has yet to be released, will show a $1.2 billion reduction in shareholder equity as a result of complicated transactions involving partnerships formerly controlled by Andrew Fastow, who was the company's chief financial officer until he was replaced on Wednesday. 

The stock has lost more than half its value since the earnings announcement, and the company has disclosed that the Securities and Exchange Commission has asked questions about its accounting practices.

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Business; Financial Desk
Enron Decline Continues
Bloomberg News

10/27/2001
Los Angeles Times 
Home Edition
C-2
Copyright 2001 / The Times Mirror Company 

HOUSTON -- Enron Corp. bonds and shares fell after the largest energy trader tapped a $3-billion credit line because it has been shut out of the leading market for low-interest, short-term loans. 

The company's stock has fallen 54% in the last 14 days after investors questioned its transactions with affiliates run by Enron's former chief financial officer. The shares fell 95 cents, or 5.8%, to $15.40 on the New York Stock Exchange.

Investors said Chief Executive Kenneth Lay has failed to reassure them that the company's credit rating won't be cut. Enron can no longer borrow in commercial paper markets, where short-term loans carry lower rates than banks offer. 

"Do they have the financial flexibility they once had? No," said John Cassady, who helps manage $3 billion in bonds at Fifth Third Bancorp. "People are questioning the credibility of management." 

The company will use its credit line to pay off $2.2 billion in commercial paper it has outstanding, Enron spokesman Mark Palmer said. 

The price of Enron's 6.75% bonds, which mature in 2009, declined 11/2 points to a bid of 84 cents on the dollar and an offer of 86 cents. At that price, the bonds, which carry a rating of BBB+, yield 9.53%. 

Investors have grown concerned that the firm's credit rating will be cut after $1.01 billion in third-quarter losses from failed investments. Enron needs good credit to raise cash daily to keep trading partners from demanding collateral and to settle transactions. 

Enron's decision to tap its credit line was "a smart financial move," said Stephen Moore of Moody's Investors Service. "It took away the hassle and time-consuming nature of rolling commercial paper and insured access to capital."

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SHORTS - Enron bond prices under pressure.

10/27/2001
Financial Times 
(c) 2001 Financial Times Limited . All Rights Reserved 

Enron, the Houston-based energy trading giant, continued to pay the price for financial opacity as its stock slumped to its lowest level since 1995 and its five-year bonds traded at 77 cents in the dollar with a yield of 11.13 per cent, down from 83 cents on Thursday. Bond prices at these levels normally suggest that investors expect a company to file for bankruptcy. Page 10. 

(c) Copyright Financial Times Ltd. All rights reserved.

http://www.ft.com.

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Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.