Risk & Compliance

Related Party Crashers? SEC Looking Into Possible Conflict on Interest at Enron

Also, E&Y's revenues nearly halved, Ford plans to issue more than $7 billion of bonds, Principal to go public this week, more.
Stephen TaubOctober 22, 2001

The Securities and Exchange Commission has requested that Enron provide information regarding certain related party transactions.

“We welcome this request,” said Kenneth L. Lay, Enron chairman and CEO in a prepared statement. “We will cooperate fully with the SEC.”

Enron, North America’s biggest buyer and seller of natural gas and electricity, noted that its internal and external auditors and attorneys reviewed the related party arrangements, the Board was fully informed of and approved these arrangements, and they were disclosed in the company’s SEC filings. “We believe everything that needed to be considered and done in connection with these transactions was considered and done,” Lay added.

As we noted on Friday, a limited partnership organized by chief financial officer Andrew Fastow racked up millions of dollars since 1997 in profits from transactions conducted with the energy company, according to The Wall Street Journal. The partnership reportedly renegotiated the terms of deals with Enron in ways that boosted its financial positions or reduced its risk of losses.

Report: E&Y Revenues Nearly Halved

Later this week, Ernst & Young will announce that its revenue growth was nearly halved in the fiscal year ending June 30, according to the Financial Times.

Specifically, the Big 5 professional services firm will report that revenues rose by 7.2 percent to $9.9 billion for the year. In fiscal 2000, revenues climbed by 14.1 percent, and by 13.5 percent the prior year.

The reason for the drop in revenue growth may be that E&Y fetches most of its business from the United States, and the U.S. economy tanked in the first half of this year.

“We have been successful this year, despite the economy and during a period of great challenge and change in our profession,” chairman James Turley told the FT.

Rival Andersen has already reported that revenues rose 10 percent this year through August 31.

Another reason for E&Y’s revenue retrenchment: the strong dollar. The firm is expected to announce that revenues increased 12.4 percent in local currency terms, according to the paper.

Turley told the FT that his clients are less focused on the longer term and are instead concentrating on watching expenses, cash management, debt covenant issues, and security concerns. “We’re going to see more covenant violations and that will drive restructuring issues,” Turley told the FT.

Ford Plans Gargantuan Offering

Now this is what you call a jumbo offering.

On Monday, Ford Motor Co. will bring to market $7.5 billion of bonds. This is more than double what the market pros were anticipating.

This comes as quite a shock, since last week the automaker saw its credit rating downgraded and reported a $692 million third-quarter loss. It’s also experiencing overall weak demand for its products. Nevertheless, Ford has attracted at least $13 billion of demand for its debt, according to wire service reports.

Also, according to published reports, investors have been demanding an extra 0.5 to 1 percentage points for the bonds since the terrorist attacks.

Last Monday, Standard & Poor’s cut its long-term debt ratings for Ford and Ford Motor Credit Co. two notches to BBB-plus, its third-lowest investment grade, from A. The short-term debt rating was reduced to A-2 from A-1.

However, on Thursday, Moody’s Investors Service, cut Ford’s long-term debt rating just one notch to A3, its fourth-lowest investment grade, from A2.

It also affirmed its A2 and Prime-1 long- and short-term ratings for Ford Credit.

Ford plans to issue $1.5 billion of 30-year bonds priced around 8 percent, or about 265 basis points over Treasurys.

Ford Credit plans to sell $1 billion of three-year floating-rate notes priced to yield about 188 basis points over the three-month Libor, which is now 2.322 percent. It also plans to sell $3 billion of five-year notes priced to yield 275 to 280 basis points over Treasurys and $2 billion of 10-year notes yielding about 270 points over Treasurys.

Bear, Stearns & Co., Credit Suisse First Boston, Merrill Lynch & Co., and Salomon Smith Barney are the lead underwriters.

Other Financing News

  • J.P. Morgan Chase & Co. filed a shelf registration to issue up to $20 billion in debt securities, common and preferred stock, and warrants. It’s also adding $5.5 billion in previously registered but unsold securities, valuing the total shelf offering at $25.5 billion.
  • On Friday, Carnival Corp. announced it has raised $400 million from 20-year zero-coupon convertible bonds in the private placement market. It plans to use the proceeds to pay off $160 million of bank debt maturing next month, and apply proceeds toward a $300 million final payment for a new cruise ship, scheduled for delivery in December.

Of course these are tough times for the cruise industry and other travel-related companies, as September 11 is not far from everyone’s minds. In fact, since the attacks, two cruise companies have filed for bankruptcy, including American Classic Voyages, which announced on Friday that it has filed for bankruptcy protection, citing losses following the attacks.

Carnival’s “liquid yield option notes” were priced at 47.566 cents on the dollar, carried a 3.75 percent yield to maturity, and are convertible into Carnival shares at $28.66, a 35 percent premium over their Thursday closing price of $21.23.

  • Symantec Corp., a computer security company, issued $525 million in five-year convertible notes in the private placement market, led by Credit Suisse First Boston. It had a 3 percent coupon and a 14.646 conversion premium.
  • In the IPO market, Principal Financial Group Inc. this week plans to go ahead with its $2 billion offering, led by Goldman Sachs Group Inc.
  • Defense contractor Raytheon Co. said it would offer 29 million shares of common stock to raise about $1 billion, which it will use to reduce its heavy debt load. Raytheon is taking advantage of the fact that since the terrorist attacks, its stock has jumped about 50 percent to $34.46, just shy of its 52-week high.

In Brief

  • On Friday, IBM Corp. brought to market a faster version of its mainframe computers. The e-server z900 nearly doubles the speed of secure transactions for large corporations, according to the company.