Moody's downgrades Enron but not to junk bond status
By the OGJ Online Staff
HOUSTON, Nov. 9 -- Enron Corp.'s long-term bonds rallied Friday after Moody's didn't downgrade Enron's debt to junk status as some investor feared.
Investors also appeared optimistic Dynegy Inc. would soon announce a deal to buy its cross town and much bigger rival. The companies confirmed Thursday they were in talks but no deal had been struck.
Investors expected Moody's to downgrade Enron's $13 billion of senior unsecured debt to junk status. Instead, Moody's downgraded the securities to Baa3 one notch above junk status. The ratings will remain under review for further downgrade.
"It's good news," said Jon Cartwright, bond analyst with Raymond James & Associates. "The market was expecting a Ba1 rating which is junk." Enron bond prices "rocketed" 20 points Friday on the news, he said.
"The bids and offers have been all over the map," Cartwright said. "It's so volatile."
Moody's said Enron's flexibility has been reduced because of a substantial loss of investor confidence. The company has drawn down its credit facilities and also faces debt maturities in the near term. The Houston energy trader could be forced to increase margins on wholesale trades if counterparties demand it, Moody's said.
"The company may not be able to retain investment grade characteristics," the credit rating agency warned.
Moody's suggested Enron could need to take action to improve liquidity and capital. An injection of equity capital in the "near term" would be viewed as "stabilizing," Moody's said.
Enron has come under severe financial pressure because investments in certain off-balance sheet entities linked to the company's equity have gone sour. Other assets, including a water company and power plant in India, have not performed either. Earlier, the company reported a third quarter loss and a $1.2 billion write-down in shareholder equity, related to a series of off-balance sheet partnerships.
Thursday the company disclosed in a filing with the Securities and Exchange Commission that it reduced previously reported net earnings dating back to 1997 by $586 million or 20%, mostly due to improper accounting in dealings with the partnerships run by some company officers. It also boosted previously reported debt by $628 million at the end of 2000 and said several employees had been terminated.
The stock has fallen from a high near $90 earlier this year and has traded as low as $7/share. At midday Friday, the stock was hovering at $9/share.
Analysts say Enron is having trouble turning over its commercial paper, which it needs to support its trading operation. The company has been looking a for large cash equity infusion or buyer to stabilize its credit problems.