Risk & Compliance

Moody’s Blues: Enron Paper Downgraded

Ratings agency also cites increased risk for company's long-term debtholders. Aetna's rating being reviewed as well.
Stephen TaubNovember 12, 2001

On Friday, Moody’s Investors Service downgraded the senior unsecured debt ratings of Enron to Baa3 from Baa2 and the company’s rating for commercial paper to Not Prime from Prime-2.

Alas, Enron’s long-term debt ratings remain under review for further downgrade. “Moody’s actions reflect the company’s reduced financial flexibility as a result of a substantial loss of investor confidence,” reported the debt rating firm.

“Enron drew down its bank credit facilities to shore up near term liquidity, but faces significant debt maturities over the near term, as well as the potential for increased margin requirements from counterparties of its wholesale trading operation,” added a Moody’s release. “In addition, uncertainty surrounding the firm’s contingent obligations creates increased risk for debtholders.”

Moody’s announced that Enron’s well-established wholesale trading franchise and its regulated pipeline businesses have solid operating attributes and generate good cash flow. “However, the rating agency concludes that the company may not be able to retain investment grade characteristics,” it added.

“Moody’s review will focus on Enron’s ability to further improve its liquidity and capital position. The rating agency would view a substantial near-term injection of equity capital as a stabilizing event.”

Other Financing News

  • Moody’s will continue to review for possible downgrade the credit ratings of Aetna Inc., whose senior debt is currently rated at Baa2, and its principal insurance subsidiary, Aetna Life Insurance Co., following Aetna’s announcement of its third-quarter earnings report.

Aetna announced a third quarter 2001 operating loss, excluding other items, of $49 million compared with third-quarter 2000 operating earnings of $42 million and a second-quarter 2001 operating loss of $96 million. Third-quarter 2001 operating results include a $13 million after-tax benefit from the sale of Aetna’s New Jersey Medicaid membership and exclude charges of $9 million after-tax resulting from the September 11 attacks.

The ratings outlook for Aetna has been negative since June 2001. In August 2001, Moody’s placed the company on review for possible downgrade following the second-quarter earnings announcement.

“The review is focused on the effectiveness of Aetna’s turnaround strategy particularly with respect to more disciplined pricing and underwriting, and improved management information tools,” said Moody’s in a statement. “Moody’s is encouraged with Aetna’s progress, which is reflected in the improvements reported in third-quarter operating earnings compared with the second quarter. Assuming further improvements in Aetna’s profits, the review may lead to Moody’s confirmation of Aetna’s current ratings rather than a downgrade.”

  • Thanks to the Fed’s tenth interest rate cut this year, U.S. junk bond mutual funds pulled in a net $187.8 million in the latest week, the fourth straight week of net inflows, according to AMG Data Services.
  • Alliant Energy Corp. issued $300 million in 10-year notes, led by J.P. Morgan and Merrill Lynch & Co. It was priced to yield 7.022 percent, or 275 basis points over comparable Treasurys. The medium-term notes were rated A3 by Moody’s and BBB-plus by S&P.
  • Rite Aid Corp. said it would offer $125 million of 5-year convertible senior notes and would use the proceeds to reduce debt from its revolving credit facility.

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