Looks like the end of the (pipe)line for Enron

By Paul Deckelman

New York, Nov. 28 - Enron Corp.'s house of cards came crashing down Wednesday, as the troubled Houston-based energy marketer's debt ratings were dumped squarely into junk bond territory and potential merger partner Dynegy Inc. canceled its planned fire-sale acquisition of its larger, but problem-plagued rival.

The one-two punch, although certainly not unexpected, caused the company's already reeling bonds to nosedive some 30 points during the session, even as its shares lost almost all of their little remaining value. Market participants speculated that the company would now have no choice but to head for the shelter of the bankruptcy courts.

"This (ratings downgrade) causes so many things to come payable for them that it puts them in a very difficult bind, and if they are going to want to continue to operate in any kind of capacity, they're going to need some protection," warned analyst Ron Gies of Stone & Youngberg LLC in San Francisco. By the end of the trading day, no filing had been reported, but "my guess is the only thing that's delaying it is discussion of debtor-in-possession facilities," he added.

Enron's senior bonds pushed down into the mid 20s by the end of the day Wednesday from prior levels in the 50s, while its subordinated debt plunged to the mid-teens from around the 40s.

A trader said that after Standard & Poor's said Wednesday morning that it had dropped the bonds to a B- rating from BBB- previously - a six-notch downgrade - the senior bonds were quoted as low as 20 bid before actually beginning to trade around 24. They got as high as 30 bid during the session before being knocked back down to end around 26 bid.

Enron "is in the doghouse," a distressed-debt trader declared as he saw the bonds bouncing around in the 26-28 bid range. "There's a lot of activity. A lot of paper trading and a lot of people getting hurt. All the par holders are puking them up, and the only ones that are buying them are guys who shorted them on the way down."

"It's just ugly," another trader said, "just another big name which should have been in the 'safe' part of your portfolio which is now just getting killed." He said the big losers would be "people who probably have a real good position in a lot of this across the whole (maturity) curve, because it was a very actively traded bond."

Traders said that after Enron announced that it was suspending all payments except those needed to keep its core operations going - presumably any kind of principal or interest payments on debt - the bonds were being quoted flat, or without the accrued interest. A changeover from being quoted with interest to flat essentially amounts to the loss of several additional points in a bond's value beyond the nominal price change.

An Enron spokesman reached late Wednesday was not immediately able to clarify the status of the company's debt payments.

The Enron bonds - which once were a solid investment-grade holding, trading on a spread basis like all other high grade debt around their par value - had been steadily heading lower since the company announced in mid-October that it would take its first quarterly loss in over four years, after taking charges of $1 billion on poorly performing businesses. More ominously, Enron also disclosed a $1.2 billion charge against shareholders' equity, relating to dealings with partnerships run by its then-chief financial officer, Andrew Fastow. Within a week, the company said that the Securities and Exchange Commission was looking into transactions between Enron and the Fastow partnerships, and he was ousted from his post later that same week.

At that point, the slide was on. Soon, the rapidly falling bonds were being quoted on a dollar basis, just like junk bonds, even though they nominally remained investment grade, although that hold became more precarious earlier this month when Enron said it overstated earnings dating back to 1997 by almost $600 million. S&P cut its senior unsecured debt rating to BBB- and Moody's Investors Service likewise dropped the rating to Baa3 - both the last stop before becoming a junk bond.

Dynegy, like Enron a Houston-based energy marketer - much smaller but in better financial shape - emerged as a possible savior when it stepped forward with a $9 billion stock-swap buyout deal that valued Enron at somewhat more than $10 per share. Assumption of about $13 billion of Enron debt was included in the deal.

But far from bucking up Enron's shares - which had fallen from their all-time high of around $90 a year earlier to around $9 when the deal was announced - news of the pending merger, was widely interpreted by the market as little more than a firesale takeover on Dynegy's terms, and the stock price continued to erode badly - especially after Enron revealed in a regulatory filing Nov. 20 that a deterioration in its credit ratings could accelerate repayment of a $690 million loan. Even though Enron subsequently managed to buy more time from its bankers by negotiating an extension of the loan into next month, the die was at that point cast, and speculation mounted that Dynegy would either drastically revise its terms downward, to reflect the new slide in Enron's value, or would walk away altogether.

Another problem for the company was the sharp drop-off in activity of its vaunted energy trading unit, as wary suppliers shied away from selling Enron any electricity or natural gas, for fear of not getting paid in the event of a bankruptcy filing.

Besides a lack of partner confidence, an analyst opined, "it looks like being cut off from cheap capital is what really killed the trading operation in the past couple of weeks. The pipelines and the trading were the two things that were really working there - and you needs lots and lots of capital to keep that trading running."

After the S&P downgrade Wednesday and a companion move by Moody's to cut the bonds five notches to B2 from Baa3 - which triggers forced repayment of a sizable chunk of debt - Dynegy dropped the other shoe and canceled the merger deal.

Gies of Stone & Youngberg said "one of the things that made me kind of skeptical that the Dynegy deal would close was that at some point as Enron was getting weaker and weaker, leading it toward a merger, Dynegy's board had to ask itself 'what are we actually buying that we couldn't just pick up if we let them go bankrupt? Obviously we could buy physical assets cheaper out of bankruptcy than if we paid a market price, and if Enron were to file, it would scare their customers enough that we could pick up a lot of that business as well on the trading side.' That obviously at some point had to have come into their internal discussions at Dynegy."

While the analyst said Dynegy remained committed to the merger deal to the end and made good-faith efforts to salvage it, "the market was saying 'we collectively think you are missing some things here and you should re-think what you are paying for this company'," as reflected by the sinking value of Enron's shares "which were not trading like the stock of a company that's about to be taken over."

Enron's shares lost $3.50, or more than 85% of their value, in extremely heavy dealings Wednesday on the New York Stock Exchange, closing at 61 cents. Volume of 342 million shares was over 16 times the usual daily turnover.

Back on the debt side, a trader said that the first mortgage bonds of Portland General Corp. - an electric utility holding company which Enron bought in 1997 but which it is in the process of selling at a loss - were being quoted Wednesday in the high 60s from prior levels in the 80s, but were still far above Enron's other debt. He said this was because Portland General is "the only other real solid assets that they own" beyond its pipelines and the bonds would be "the only money winners" because "the only way you can get paid is to have assets."

As for the rest of the bonds, the trader noted that prior to Wednesday, they were still trading off the investment-grade desk at his shop, despite their loss in value. After the downgrades and the demise of the merger deal, "they went directly to our distressed-debt desk. They passed me by completely."

TRADER TRIVIA: Enron is one of several large companies which in better times paid substantial money to buy the naming rights at a well-known professional sports facility. Where is it and who plays there? What other now-troubled junk bond-issuing companies find themselves in the same boat?

ANSWER: The Houston Astros of the National League play at Enron Field. Other companies which likewise paid big bucks for naming rights before falling upon hard times and which perhaps now regret it include PSINet (currently in Chapter 11), which named the new football stadium in Baltimore; Pro Player Inc., (the athletic apparel division of bankrupt Fruit of the Loom), which renamed Miami's former Joe Robbie Stadium; and Conseco Inc., the problem- plagued insurance company which sponsors the Conseco Fieldhouse basketball/hockey arena in Indianapolis.

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