Ann de Rouffignac
HOUSTON, Nov. 28, 2001 – Enron Corp. lost its investment grade credit rating Wednesday, which analysts said could force the big energy trader into bankruptcy.
The downgrade triggers the payment of $3.3 billion in liabilities and negatively impacts the trading and marketing organization. “I expect they will have to file bankruptcy,” said Andre Meade, analyst with Commerzbank Securities in New York. “And Dynegy will walk away.”
Standard & Poor’s downgraded Enron Wednesday to junk status after liquidity became a growing concern and doubts about the merger with cross-town rival Dynegy Inc. increased.
“A move by Enron to seek protection from its creditors through a voluntary filing under Chapter 11 of the US Bankruptcy Code is a distinct possibility if the merger falls through,” said S&P.
One trading partner said the loss of investment grade credit nullified trading agreements between Enron and its counterparties. EnronOnline was reported no longer trading as a result of the downgrade.
S&P lowered the long-term corporate credit rating to single B- from triple B minus. S&P said it has lost confidence that the merger will be completed especially since the capital markets no longer appear to have confidence in the merger.
Bond analysts were less certain about when and or if Enron will file bankruptcy, since the company hadn’t commented early in the day.
“Inside of 48 hours, we will know how bad this will be on Enron’s trading and marketing group. If it is as bad as we think, Enron will be well advised to file for bankruptcy,” said Jon Cartwright, bond analyst at Raymond James & Associates.
“We suspect the liquidity that Enron was accumulating was used to support their trades,” he said. “We think that is where the liquidity went. Liquidity became a bigger issue.”
Dynegy made a stock-for-stock offer to buy Enron for about $10 per Enron share. But Enron’s shares started to slide even after the merger was announced on fears the deal couldn’t go through as proposed. The shares plummeted Wednesday morning to $l.23/share and were halted by the New York Stock Exchange on imbalance orders. More than 135 millions shares traded by noon eastern time.
“As the credibility of Enron collapsed, no one would extend terms to Enron,” said Cartwright.