Major US & European Banks' Exposure to Enron (Fitch)

verfasst von Cosa, 14.12.2001, 00:48

Hi!

Enron und die Banken; die Agentur Fitch hat heute einen Bericht dazu rausgegeben:

<font size="4">Major US & European Banks' Exposure to Enron</font>

Summary

~ In a comment issued on 30th November entitled “Sector Analysis of Enron Exposure - CDOs Most Affected” Fitch cited inter alia in the sub-section “Financial Institutions and Securities Firms” the then publicly available information on US and European banks’ exposure to Enron. As the group’s problems have inexorably unfolded, the agency has been examining newly published data and obtaining exposure figures on a confidential basis from Enron’s banking counter-parties. On the basis of what it has learned to date, Fitch’s conclusion is that the exposures revealed are not in themselves a threat to the future of any of the large US or European banks, nor indeed are they likely to lead to negative rating actions. Fitch is not at present able to judge, however, what the accumulated impact of losses on Enron-source transactions across all sectors of the world economy will be. It cannot, therefore, rule out ultimately taking negative rating actions, if necessary.
~ With debts of USD32bln, much of it unsecured, it is not surprising that Enron’s collapse generated so much unease in the capital markets, particularly as regards potential losses within the banking sector. Initially, a lack of publicly available information focused the market’s attention on recent loan syndication information. While such league tables provide a clue as to what banks’ exposures might be, market positions in primary underwritings of syndicated lending often bear little resemblance to final exposures. This is certainly true in Europe and the US, where the power syndication markets are active. Typically, underwriting banks do not hold more than 10% of the original amounts underwritten. Nevertheless, given that Enron was also heavily involved in trading and off-balance sheet activities, many US and European
banks have also been exposed to significant other risks. In fact, many institutions are still trying to determine what their actual net exposures are and consequent losses will be. This is not a straightforward exercise as the realisable value of collateral (which is in many cases proving difficult to determine at this point in time) and the successful settlement of credit derivatives will be significant factors in determining ultimate loss levels.

Banks

United States: Several of the larger banking firms have, for many years, been relationship bankers to, and have multi-faceted exposures to, Enron. Citigroup and JP Morgan Chase, which were both involved in the Enron-Dynegy transaction as well, appear to have the greatest nominal exposure. Citigroup has confirmed that its exposure prior to the bankruptcy filing was slightly below USD800mln, with an estimated USD300mln unsecured and USD500mln secured. JP Morgan Chase indicated that it had USD500mln unsecured exposure plus additional secured exposure of at least USD400mln. Both of these institutions participated in the postbankruptcy debtor-in-possession (DIPs) financing, which altered their exposure. DIPs financing is approved by the bankruptcy court as being postbankruptcy financing that is structured with priority over prior claims (minimal credit exposure has been associated with DIPs financing historically). While these exposures are material, both financial institutions are well-positioned to handle a problem credit of this magnitude. Other large US banking institutions also have both secured and unsecured exposures to Enron or one of its subsidiaries, that are, in some cases, proportionately meaningful. In addition, a number of US securities firms also have select exposure although much of it is considered well secured. Despite the banks’ exposure levels, based on our current knowledge, we are not anticipating any bank rating downgrades triggered specifically by Enron exposure. One area that we will watch with keen interest, though, is the settlement of credit derivatives. Enron is one of the more active names around which credit derivatives were written, and we expect this to be a stern test of the efficacy of such instruments as a viable means of credit loss mitigation.

United Kingdom: a number of the major banks will suffer some Enron-related losses. To date, only Abbey National has publicly disclosed the extent of its exposure to the troubled group (totalling GBP115mln). This will result in a GBP95mln increase in provisioning in the second half of this year. However, this should be viewed in the context of an interim operating profit of GBP698mln for the six months to end-June 2001 and a common equity base of GBP6.9bln as at the same date. HSBC has stated that it comments only on specific cases if there is a “material” impact on earnings. The absence of comment implies that its exposure to Enron is not considered “material” in a group earnings context. Of course, for a group which posted a pre-tax profit of GBP5.4bln for the first half of 2001, losses could be hefty in nominal terms and still not really affect profitability greatly. Much of the recent speculation in the UK has centred around Barclays and The Royal Bank of Scotland Group (RBSG), given that both are active in the European syndicated loan power and energy markets. But, as a matter of policy, neither comments publicly on specific exposures. Nevertheless, on 3rd December, in a “pre-close” year-end results briefing to analysts, Barclays did state that its “annual net provisions charge is expected to be broadly in line with the published risk tendency estimate [i.e. Barclays’ cyclically smoothed annual level of credit losses] of GBP1.1bln reported at 30th June 2001.” Thus, although Enron is not specifically mentioned, this does suggest that related losses are unlikely to affect materially the group’s financial position. However, given that the actual loan loss provision charge has been considerably lower than the risk tendency calculation for the past few years, this means that actual Enron-related losses could yet prove substantial. In this context, it is interesting to note that a regulatory filing made by Enron cited Barclays as the largest creditor to one of its subsidiaries (Enron North America Corp.), owing it USD126mln.

Benelux: The Dutch banks have been reasonably forthcoming, with two of the largest (which together account for c.50% of the domestic market) making public announcements. ING has stated that its Enronrelated “exposures” total c.USD195mln, although has declined to detail what provisions may be needed. The other major player, ABN AMRO, has disclosed that it estimates an additional EUR110mln provision will be made in the fourth quarter because of Enron. This is expected to increase total provisions for year to c.EUR1.3bln from the bank’s recent forecast of c.EUR1.2bln. Of the two largest Belgian banks, only the Belgo- Dutch group Fortis has publicly disclosed its gross exposure of EUR22mln, which is not significant. Moreover, net exposure is even lower. understand KBC’s net exposure, although material, limited and small in relation to net income.

Germany: Deutsche Bank revealed in a public statement that its maximum loss would be a “two digit” (USD) million figure. In a similar move, Dresdner Bank disclosed that its exposure is less than USD100mln, while HVB’s exposure is between a “higher two and a lower three” digit (EUR) amount. Commerzbank has only a small amount of Enron debt outstanding after reducing its commitment markedly over the past year. As the German Landesbanks concentrate on wholesale business and have built up their international exposure over the past two to three years, it is not surprising that a number of them have taken on Enron-related risks. Compared with equity their exposures are higher than those of the four big commercial banks, but do not constitute a material cause for concern. Although exposures include loans, guarantees, derivatives and investments in securities, the bulk relate to project financing of power stations whereby payment of interest and principal is covered by cash flows. Assuming energy production continues, even though the operator may change, most Landesbanks do not plan loan loss provisions at this stage. By contrast, provisions are likely in relation to projects still under construction (e.g. where Enron provided a completion guarantee) and against unsecured exposures. Therefore, although the German banks may face some Enron-related losses, we do not currently expect any negative implications for their ratings, based on our initial investigation.

France: Among the banks which have made their total risks to Enron public, Crédit Lyonnais seems to be the most largely exposed. Its commitments amount to USD250mln gross but are USD125mln net of collateral, equivalent to 1.4% of the group’s end- June 2001 equity. It should be noted that Crédit
Lyonnais also benefits from a EUR265mln general reserve against US risks, set up to enable it to manage the downturn in the US economy. Société Générale and Crédit Agricole (via its 100%- owned subsidiary Crédit Agricole Indosuez) have announced that they had net commitments of USD 71mln (0.4% of end-June 2001 equity) and USD 35.6mln (0.12%) respectively to the failing US energy broker. In line with usual policy, BNP Paribas has not so far made any figures public. As a whole, total commitments for French banks are not significant in comparison with their size and expected performances for full-year 2001.

Italy: Public disclosure from the Italian banks has been limited though the country’s largest bank, IntesaBci, has revealed it has a total net exposure to the Enron Group of c.EUR350mln (equivalent to 2.2% of common equity at end-June 2001), without stating what level of guarantees has been received or reserves made. Around two-thirds of the exposure derives from bonds related to a structured finance operation issued by a Brazilian holding company. The other five large Italian banks have made no public declarations. Fitch understands that their exposure, where it exists, represents a small proportion of equity.

Switzerland: Credit Suisse, one of the two dominant domestic banking powers, disclosed that it has a net exposure to Enron companies of less than USD200mln (or less than 1% of common equity) as a result of credit derivatives provided by a number of US investment banks. Assuming these are settled, Enron-related losses before tax could total up to USD100mln and a provision of between USD75mln and USD100mln is expected. UBS, the other major Swiss player, has not commented publicly on Enron but Fitch does not expect it to be negatively affected by the collapse.

Spain, Portugal, Ireland & Scandinavia: the largest banks appear to have escaped relatively
unscathed. None to date has disclosed any material information.


Enron - A chronology of its demise

~ On October 16, Enron announced that it would take a USD1bln post-tax charge - relating to difficulties with creating a water, broadband and residential energy business - against earnings in the third quarter of 2001 and reduce its balance sheet equity by USD1.2bln after the termination of a “structured finance transaction”. The company also stated that it wanted to make the charge to better reflect core earnings. The media later reported that Enron's counterparty in the structured finance transaction was an investment partnership called LJM2 Co-Investment that had been set up and run by the CFO.

~ Following the earnings release, the SEC requested detailed explanations of transactions
and accounting methods.

~ By late October the market began to lose faith in management credibility, the stock fell and spreads on the debt widened. There became a concern that Enron’s trading counterparties would lose confidence, impairing the company’s financial flexibility and ability to conduct business. Questions began to be asked regarding structured transactions including Marlin Water Trust II and Ospery. If these were to unwind Enron would need to repay approximately USD3.3bln. Enron could not verify that the underlying assets had adequate market value to fully repay the debt.

~ Enron fully drew down its committed bank facilities and paid down outstanding commercial paper, leaving approx. USD1bln in cash to support its normal business activities. Simultaneously it began to negotiate a new facility secured on Northern Natural and Transwestern Pipeline Company assets, its regulated pipelines.

~ Several class action lawsuits were brought against the company alleging it misled investors in its financial statements and failed to report material events in a timely fashion.

~ On November 5, Fitch downgraded Enron’s senior unsecured debt to ‘BBB-‘ from ‘BBB+’, reflecting the difficulties Enron faced in managing its liquidity position - in the face of an erosion of investor confidence.

~ In a Form 8k filed on November 8, Enron restated earnings for the period 1997-2001; this reduced net income by USD96mln in 1997, USD113mln in 1998, USD250mln in 1999 and USD132mln in 2000, but increased it by USD17mln and USD5mln for the first and second quarters of 2001, followed by a reduction of USD17mln for the third quarter. These figures resulted from the retroactive consolidation of several entities in each of the reporting periods.

~ On November 9, the company entered into a merger agreement with Dynegy Inc. (the transaction had significant support from ChevronTexaco Corp, a 27% stakeholder in Dynegy). Under the terms of the agreement, Dynegy agreed to acquire Enron for
approximately USD9bln in stock and some USD13bln in debt. At the same time Enron, the Northern Natural Gas Company, a subsidiary of Enron Corp., and Dynegy entered into a subscription agreement whereby Dynegy purchased USD1.5bln of Northern Natural preferred stock with an option to buy 100% of
Northern Natural Gas’s common stock.

~ On November 16, Enron completed negotiations for USD450mln and USD550mln credit facilities secured by the assets of Northern Natural Gas Company and Transwestern Pipeline Company respectively.

~ The third quarter 10Q filed November 19 2001 stipulated Enron also had to pay off or refinance USD690mln in debt obligations by November 26 2001 based on a ‘BBB-’ rating trigger. Nearly USD4bln in additional payments would be triggered if its credit rating fell below investment grade.

~ As the company’s stock price continued to fall to below the USD5-mark, its acquisition by Dynegy Corp began to be questioned. The price of the deal was expected to be cut to USD5bln as it was being renegotiated. Enron’s share price fell below USD3. Enron’s online commodity trading platform was shut down.

~ On November 28, Dynegy terminated the merger, citing breaches and material adverse changes. Dynegy exercised its option to acquire the Northern Natural Gas Company. The rating agencies lowered Enron’s rating below investment grade hours before the merger was officially terminated, Fitch going to ‘CC’ from BBB-’.

~ On December 2, Enron filed for Chapter 11 bankruptcy. In addition, Enron filed a suit against Dynegy for wrongful termination of the merger agreement seeking USD10bln in damages and challenged Dynegy’s option to acquire Northern Natural Gas.

Quelle - pdf - Datei

Fitch war weiterhin aktiv und hat die Dresdner Bank abgestuft, den ganzen Text gibt es auch zu lesen.

schöne Grüsse
Cosa







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• Major US &amp; European Banks' Exposure to Enron (Fitch) - Cosa, 14.12.2001, 00:48