Posted on 11/28/2001 2:14:15 PM PST by RightWhale
Enron Near Collapse After Dynegy Pulls Out
By C. Bryson Hull
HOUSTON (Reuters) - Energy trading behemoth Enron Corp. tottered at the edge of one of the biggest corporate collapses in U.S. history on Wednesday as its rescue by rival Dynegy Inc. blew apart.
Shares of Enron, which was only recently ranked No. 7 on the Fortune 500 list of the biggest U.S. corporations, slumped 85 percent to an all-time closing low of 61 cents. Major credit rating agencies slashed their ratings on Enron's bonds to junk status, triggering expectations a company that was a darling of Wall Street just a year ago will be forced into bankruptcy.
The dizzying plunge in Enron's fortunes shook financial markets worldwide, rocking the London Metal Exchange and weighing on U.S. stocks as it left creditors, such as banking giants J.P. Morgan Chase and Citigroup Inc., facing substantial losses.
Enron's latest crash marked another low in a stunning free-fall that began with a $638 million quarterly loss six weeks ago. Surprise disclosures, including the admission it overstated earnings by almost $600 million since 1997 and kept huge debts off its books, led investors to rapidly lose faith in a company valued at almost $80 billion a little more than a year ago.
After trading Wednesday, Enron's market value was barely $450 million. A U.S. regulatory probe into its murky off-balance sheet dealings and the unexpected departures of a chief executive in August and a chief financial officer in October helped fuel the fall.
Enron "entrapped the sophisticates," said Robert Stovall, senior strategist at Prudential Securities, referring to what was once an almost fawning admiration for Enron by institutional investors. "I think this is going to become a classic case."
Stovall, with nearly 50 years of Wall Street experience, said he could not recall any previous corporate unraveling that could match Enron's.
"You would have to go to pre-SEC days for that," he said, referring to the creation of the U.S. Securities and Exchange in the aftermath of the stock market crash of 1929.
Enron set a New York Stock Exchange record with 181.86 million shares changing hands, almost 33 percent more than the previous record set by Lucent Technology on Jan. 7, 2000.
The U.S. Treasury Department said it was monitoring Enron, but said it has yet to see "anything extraordinary."
ENRON LIKELY HEADED TO COURT
Dynegy accused Enron of breaching representations it made when a takeover agreement was negotiated on Nov. 9, invoking an escape clause that let it pull out of the all-stock deal valued at $9.3 billion at the time. Enron said it would cease payments on all but its core operations.
Already awash in some two dozen shareholder and employee lawsuits alleging misrepresentation, Enron on Wednesday founded a litigation committee that was certain to take aim at Dynegy's pullout.
Enron can expect more lawsuits, especially from big investors like mutual and pension funds, Baylor University investments professor William Reichenstein said.
"The big question now is whether there is anything left to go after. That remains very much in doubt," he said.
The loss of Enron's investment-grade credit rating forces some $3.9 billion in debts to come due immediately, a major problem for a company that has spent most of the $5.5 billion it sought in recent weeks to stay afloat. Enron said in a recent regulatory filing that it was unlikely to "continue as a going concern" were its credit rating to be slashed to junk status.
Dynegy apparently took that warning to heart.
"We knew when to say 'no' and this morning we said 'no,"' Dynegy Chairman and Chief Executive Officer Chuck Watson said during a brief conference call with investors.
Dynegy said it would exercise an option to buy Enron's Northern Natural Gas Pipeline with the $1.5 billion it and partner ChevronTexaco Corp. put into the deal. Enron said it was reviewing Dynegy's actions, including its "assertion that it is entitled" to buy the pipeline.
Sources close to negotiations late Tuesday on efforts to lower the value of Dynegy's deal by about half said it became increasingly clear that Enron's tricky and often indecipherable accounting was becoming a sticking point,
Dynegy said it stopped trading with Enron Wednesday morning, pegging its exposure at $75 million. Others traders said they would deal with Enron on a cash-only basis, a virtual death sentence for a trading outfit that has $16.86 billion in debt and other obligations -- and less than $2 billion in cash on hand.
Operations were suspended indefinitely at Enron's once highly lucrative online trading system, EnronOnline. The unit accounted for up to 90 percent of Enron's earnings, and was considered the jewel of the trading franchise that Dynegy coveted most.
RISK MANAGEMENT FAILURES
Enron, which touted itself as an agile risk manager, found its credit and debt had spiraled out of control as a series of partnerships designed to hide debt off of its balance sheet became public in recent weeks.
The partnerships, which included top Enron executives, provided financing in exchange for guarantees that Enron's stock stay above certain levels and its credit remain investment-grade. But they came back onto the balance sheet with a vengeance, as Enron found it would have to meet massive debt obligations as its shares and credit fell.
The stock peaked at $90.56 in August 2000, riding high on the cresting wave of the technology boom after Enron took its trading outfit online and promised to bring its business model into the broadband communications arena.
Andre Meade, a Commerzbank analyst who has been consistently bearish on Enron and the deal, said its core business deteriorated at an increasing pace in recent weeks, and the ratings agencies could not find the liquidity they wanted inside Enron.
"The numbers were not enough to soothe them," said Meade, who downgraded Enron to "sell" from "hold" on Wednesday. "This company should have been downgraded to junk weeks ago. The ratings agencies had given them several weeks, and they just couldn't hold out anymore."
If Enron had any capital plant, maybe; like Chrysler, or like whichever airplane company it was a couple years ago. Or even since WTC911. Or maybe like S&L. But a paper company isn't worth the bailout.
It's amazing how so many companies refuse to bear the risk, but covet all the rewards. I don't feel sorry for their creditors. It would seem any Big 5 firm could have found the lies.
C'mon, you know the answer. It's been published on this very forum. The figure has been shoved under your nose. You may have chosen to ignore or to forget it, but I remember.
C'mon, lewislynn. What's the answer?
So can we expect a Bush/Cheney bailout of some kind? Or are things to bleak for this impoding star which is about to become a black hole?
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