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Enron draws on bank credit, reports $4 billion in on line deals

By Ann de Rouffignac
OGJ Online Staff

HOUSTON, Oct. 26, 2001 — Enron Corp.’s short-term liquidity is under pressure now, analysts said, prompting the beleaguered Houston energy trader to draw down more than $1 billion from its bank credit lines.

As recently as Tuesday Enron CEO Kenneth Lay sought to reassure investors liquidity wasn’t an issue, noting the company had a credit facility of $3.5 billion to backstop its $1.8 billion commercial paper program. Published reports said Enron drew down $3 billion of its available credit. Phone calls to Enron were not returned.

“I can’t imagine anyone buying the commercial paper these days. It’s probably impossible to issue commercial paper at a reasonable rate,” said Jon Kyle Cartwright, fixed income analyst with Raymond James & Associates. “We have to watch the impact of this crisis on the trading organization.”

Liquidity is essential to keep Enron’s largest and most profitable business, the trading organization, functioning. Enron said late Thursday more than 8,400 transactions were conducted by Enron Online with 1,387 counterparties for a gross total of $4 billion. The company said the activity demonstrated customers have confidence in its core businesses.

“We are making it clear that Enron has the support of its banks and more than adequate liquidity to assure our customers that we can fulfill our commitments in the ordinary course of business,” said Jeff McMahon, chief financial officer in a statement. “This is an important step in our plan to restore investor confidence in Enron.”

The stock continued to fall Friday, trading at $15.56 at mid-morning, down 79 cents, from Thursday’s close.

Bond analysts said the Enron crisis has come at a bad time for the bond market when it was already experiencing losses and corporate issues were not performing well. Enron needs “breathing space till the perception of what’s going on has been cleared up,” Cartwright said. “For those of us trying to hold on to the company, we are not happy with the way the company has handled it [the crisis],” said Cartwright.

He said a long-term bond maturing in 2028 opened Friday at 70-74¢ on the dollar, down 5 – 10¢ in just 2 days.

Cartwright said he still believes Enron’s problems are solvable, but he questioned if there is anyone at Enron that can handle the crisis. Replacing the chief financial officer less than 24 hours after publicly giving him a vote of confidence was not the best thing for Lay’s credibility, he said.

Credit rating agency Fitch Thursday placed Enron Corp. securities on watch for a potential downgrade. Fitch’s action was taken 1 day after Enron replaced chief financial officer Andy Fastow, the latest in a 2-week series of events that have cut the company’s market capital by half.

The stock price melt down began after Enron reported a $1.2 billion reduction in balance sheet equity related to unwinding of various off balance sheet transactions Oct. 16 and a $1 billion after-tax charge to earnings to be taken in the third quarter.