Fitch on Enron: The Coming Creditor Battle Over Enron's Assets.
NEW YORK--(BUSINESS WIRE)--Nov. 30, 2001
With total assets of $62.8 billion at Sept. 30, 2001, Enron would become the biggest bankruptcy in United States history if it files for bankruptcy as expected. Fitch anticipates a lengthy and contentious battle over Enron's assets. Some of the key issues for creditors are:
What is the Enterprise Value?
There are several issues that cloud an enterprise valuation of Enron. First and foremost is the uncertain value remaining in Enron's wholesale trading business. Approximately 75% of Enron's total 2000 Income before interest, minority interests and taxes was generated by the wholesale services segment, which consists primarily of the energy trading business. Based on recent refusals of Enron's energy trading partners to accept the company as a counter-party and exacerbated by implementation of trading restrictions on the company by the New York Mercantile Exchange, Fitch believes significant doubt has been cast upon Enron's ability to continue to operate this business at its previous scale. Further, previous valuations of bankrupt trading businesses have been quite low. Therefore, Fitch believes it would be prudent to assign a very conservative valuation to this segment in a recovery analysis. Secondly, due to the ongoing Securities and Exchange Commission investigation of Enron's accounting, and previous restatements of earnings, there exists uncertainty over the accuracy of historical earnings reports. Finally, Enron's retail energy segment is closely integrated with the company's wholesale operations for energy supply. If the wholesale operations remain shutdown, the future cash flow generation ability of the retail segment may be materially impaired.
How will the value of Enron's assets be allocated in a bankruptcy?
Fitch has conducted a preliminary analysis of recovery prospects for various creditor classes. Enron's pipeline business has historically been a steady source of cash flow generation. A market comparable method of valuation for the transportation segment results in strong recovery prospects for secured creditors at Northern Natural and Transwestern. Fitch estimates there would be roughly $1 billion of residual value from the pipelines following the satisfaction of their secured and unsecured claims and Dynegy's claim. As part of the merger agreement with Enron, Dynegy injected $1.5 billion into Enron in exchange for preferred stock in Enron's largest pipeline, Northern Natural Gas, which can be converted into ownership of the pipeline. Dynegy has exercised this option. It is noted that as part of its investment in the preferred stock, Dynegy negotiated the right to block a bankruptcy filing at this subsidiary.
Enron has various other assets that could be monetized to satisfy unsecured creditor claims. Enron has an agreement to sell its Portland General Electric subsidiary for anticipated net proceeds of about $1.8 billion in cash or cash equivalents in 2002. In addition, Enron has contracted to sell $800 million of merchant assets which is expected to close before year end, subject to execution risks including regulatory and transfer risks. The net proceeds that could be realized from cash on hand, inventories, and various other monetizable assets are difficult to estimate. Moreover, the full extent to which the company's assets have been pledged is uncertain.
The outstanding amount of senior unsecured debt is currently estimated to be about $11 billion, excluding possible liabilities arising from trust structures such as Marlin and Osprey. Additionally, other general unsecured claims in a bankruptcy would include customer deposits, minority interests, project and structured finance make whole obligations, as well as an unknown amount of amount of exposure to is shareholders, employees and others relating to the spate of recent litigation against Enron. The amount of these other general unsecured claims can not be determined at this time.
Despite the fluidity of the situation, Fitch's preliminary view is that unsecured creditors would realize recoveries in the 20-40% range. This opinion considers the deterioration in the value of the wholesale trading business, the pledge of flagship assets to secured creditors, the uncertain cashflow generation prospects of the retail segment in light of the wholesale business situation, the opaque and uncertain accounting and off balance sheet liability issues, and other unexpected liabilities.
Will Enron be able to continue to operate as a going concern or seek to liquidate assets?
Enron would require a sizable debtor in possession facility to fund ongoing operations and induce counter-parties to resume business with Enron. Fitch believes it is uncertain whether Enron has adequate unencumbered or over- collateralized assets to obtain a DIP large enough to enable the resumption of wholesale operations.
What is the situation for secured creditors to Marlin Water Trust II and Osprey Trust?
The ratings of Marlin's $915 million senior secured notes and Osprey's $2.4 billion senior secured notes rely on support of Enron. A liquidation of the underlying assets is the primary source of repayment. A shortfall in liquidation proceeds would become a claim against Enron, which may be subject to subordination to the claims of other creditors in a bankruptcy.
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|Date:||Nov 30, 2001|
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