Enron: A chaotic collapse
By Our Corporate Bureau | 01 Dec 2001
“It's hugely complicated and it's going to take many years to unravel,“ says Jon York of London lawyers Richards Butler, working on the case for a number of Enron's creditors. In Europe 5,400 staffers were waiting for news of job losses from PricewaterhouseCoopers, called in as administrator on 29 November, the day after Enron credit was reduced to junk status. Distressed banks and trading partners were counting the cost of an ignominious failure by the once-mighty trading house that billed itself 'The World's Leading Company.'
US banks J P Morgan Chase, Canada's Imperial Bank of Commerce, Australia's NAB, Dutch ABN Amro, French Credit Lyonnais and Britain's Abbey National are among Enron's biggest creditors. US energy traders like Duke Energy, Williams and DynegyInc also are exposed though many energy groups in Europe and the US say they are able in recent weeks to close their positions in an orderly fashion. Worldwide some 25 companies so far have revealed they are owed more than $6 billion of secured and unsecured loans. That includes $3 billion of secured loans to a syndicate that was financing Enron's Indian Dabhol power project.Global economy not at risk
But there appeared little risk. Enron's demise would have a material impact on the struggling world economy, with optimism growing for a recovery next year. The company's own accounts show that it has some $62 billion of assets on its books - its bankruptcy would be the largest in history, dwarfing the $35.9 billion in assets Texaco had when it went under in April 1987.
Shares, bonds and the dollar all rose on 30 November as increased hopes that the global economy will pick up soon counterbalanced worries about the implications of Enron's fall. “The sanguine nature of markets' reaction to Enron shows how much investors' psychology has recovered. If this had happened two months ago it could have been very different,“ says John Hatherly, head of global analysis at M&G. “News of the financial crisis at Enron knocked markets hard on 30 November because of the group's global links. Since then the market has been more selective about who it believes is exposed,“ says pan-European strategist Tamzin Hobday of West LB Panmure.
Banker Bear Stearns says the crisis had deepened the spread of corporate debt versus government guaranteed bond issues. In Japan, the yen came under some pressure from worries that struggling Japanese banks and funds are exposed to Enron debt. Enron has five outstanding yen bond issues, totalling 105 billion yen ($848 million) - all fed to Japanese investors.
Enron shares on 29 November closed down 41 per cent at 36 cents on the New York Stock Exchange, having peaked at $90.56 in August 2000. In Washington, congressional panels launched probes into the finances of the Houston-based firm that employs 21,000 worldwide. Republican House Energy and Commerce Committee Chairman Billy Tauzin launched an inquiry and instructed his staff to begin preparing for hearings on Enron's financial collapse early next year.
Enron on brink of bankruptcy
Reports from Houston say the slick financing that helped turn Enron Corp into a mighty power-brokering dynamo became its Achilles' heel leaving the energy trader teetering towards bankruptcy after a smaller rival abandoned plans to buy it. Enron's swagger was bold when shares of the largest buyer and seller of natural gas in the US traded at about 85 dollars per share a year ago. That swagger became a limp on 28 November when shares melted down to less than a dollar.
“I don't think that you see such a well thought of company falling down this quickly,“ says Robert Christmas, a bankruptcy lawyer with Nixon Peabody LLC, New York, of Enron's free fall over the last few weeks. “I can't think of one in recent history where it was this fast.“
The collapse made bankruptcy seem inevitable for a company that just months ago was the country's seventh biggest in revenue - but crumbled after revealing questionable partnerships and admitting it overstated profits for four years.
In quick succession on 28 November, two rating agencies dropped Enron's credit rating to junk status, forcing it to pay billions of dollars of debt it probably cannot afford. Dynegy Inc immediately backed out of an 8.4 billion-dollar acquisition plan after several days of efforts to renegotiate the deal. Investors unloaded 339 million shares on the New York Stock Exchange -a record for one day - and sent Enron stock down 85 per cent to close at 61 cents.
US Congress to probe Enron's financial disaster
US Congressional panels, in the meantime, have launched probes into Enron Corp's financial disaster, as the energy trader's European arm sought creditor protection and the aftershocks of the collapse ripped through world markets. Creditors, traders and banks faced the loss of billions of dollars after a rescue take over of the Western world's dominant power and gas trader, thrown into crisis by a cash crunch and investor doubts about its viability, evaporated on 28 November.
The company is now working with its lawyers and advisers to file for bankruptcy proceedings in a US court and is likely to do so early next week, a source familiar with the proceedings said. “They are working on the details by early next week,“ the source, who has been in regular contact with Enron management, told Reuters.
He said Enron is looking to file for Chapter 11 and seek temporary protection from creditors and then work on ways to reduce its debt. He could not confirm whether Enron wanted to revive its operations in the form of a smaller company or not.
Australian banks exposed
Four of Australia's biggest banks said on 30 November they had Enron liabilities ranging from around $50 million to $100 million. Commonwealth Bank of Australia had a contingent exposure to the energy firm of under A$100 million ($52 million), Westpac Banking Corp said its unsecured exposure was around $51 million, ANZ Banking Group's exposure was $69 million and National Australia Bank Ltd's $104 million. NAB, Australia's largest bank, said the Enron liability represented “less than 0.1 per cent“ of its total international loan portfolio.
ANZ, the fourth-biggest bank in Australia, said in addition to the $69 million direct exposure, it had indirect or contingent exposures of about $51 million on standalone power projects. But it said earnings expectations for 2001/02 remained unchanged. Several Japanese brokerage firms have Enron bonds in their money market funds. On 29 November, French bank Credit Lyonnais said it was exposed by $250 million, half of it unsecured, and utility holding company Duke Energy Corp reported about $100 million of unsecured exposure.
J P Morgan Chase & Co said it had $500 million of unsecured exposure, and Citigroup Inc had between $700 million and $800 million, about half unsecured. Dutch bank ABN Amro is part of an international syndicate that has loaned up to $3 billion to Enron's Dabhol Power Co project in India, all of it secured.
Enron hearings
In the meantime, legislators from both major US parties called for inquiries into the finances of Enron, and as recently as February had been a bulletproof Wall Street favourite. Republican House Energy and Commerce Committee Chairman Billy Tauzin launched a congressional probe and instructed his staff to begin preparing for hearings on Enron's financial collapse early next year.
Enron found few partners to trade with in exchanges the world over, its credit ruined and financial heart barely pumping. The New York Mercantile Exchange restricted all trades with Enron, and the effects of that order-helped drive the price of oil lower there. The company's once-lucrative Internet trading platform, Enron Online, reopened on 29 November for the sole purpose of allowing traders to unwind their positions with Enron and manage their credit, a spokesman said. In London, accountant PricewaterhouseCoopers was appointed administrator for Enron Europe and a number of its operating companies - a legal move similar to US chapter 11 bankruptcy protection.
The appointment follows the downgrading of Enron's debt on 28 November and the impact on its ability to trade, the accounting firm said in a statement. The administrator said buyers were already circling viable parts of the European business, including its metals trading operation. Enron said it might not be able to pay declared dividends on some preferred stock.