How predictable.
As Enron Corp. prepared to file for bankruptcy over the weekend, the shocking debacle entered its inevitable next phase: Second-guessing, finger-pointing, and after-the-fact posturing.
SEC chairman Harvey Pitt now says he too is investigating the former energy high-flier’s management team, which concedes it has been subpoenaed by the regulatory agency. In addition, at least two congressmen have pledged to hold hearings to find out just who can be blamed for the total collapse of Enron — and the loss of virtually all the funds in the company’s employee retirement plan.
Now everyone is coming under the microscope. Questions are being raised as to why the company’s board of directors didn’t spot Enron’s financial difficulties much earlier. That same criticism is being leveled at credit rating agencies, who downgraded Enron’s debt rating only late in the game. The business media, too, are coming in for a pillorying, with pundits wondering how the financial press missed what was going on at the Houston-based energy company. And in fact, in 1999, CFO selected Enron’s then-CFO Andrew Fastow as an excellence award winner. Enron’s November announcement that it was taking a write-down due to some of Fastow’s third-party transactions was the first hint of the massive troubles at Enron. The company relieved Fastow of his duties soon after.
The one group, though, that faces the most scrutiny — besides Enron management, that is — is the Enron audit team at accounting firm Arthur Andersen. “The auditors — the Big Five auditing firms — have got to look at themselves and say, how can this sort of thing happen?” said David Hawkins, an accounting consultant with Merrill Lynch and a professor at Harvard University, in a wire service report.
Indeed, on Friday Big Five rival Deloitte & Touche promised to expand the scope of its peer review of Andersen’s audit of Enron. “In light of recent developments, we believe that extending the peer review to include work done in other offices, including Houston, and other procedures that Deloitte & Touche deems appropriate and necessary is the right thing to do,” said Joseph Berardino, chief executive of Andersen, according to published accounts.
Deloitte will be examining Andersen’s quality control procedures in its audit practice. This is a normal part of the accounting industry’s self-regulatory process, which calls for major accounting firms to conduct reviews of other firms every three years under the auspices of the Public Oversight Board, a regulatory panel that oversees the large U.S. accounting firms.
In fact, Deloitte’s review of Andersen was nearly completed when Enron’s troubles came public, according to published reports. When Deloitte completes its review, it could either deem Andersen’s systems to be perfectly fine or issue a qualified opinion stating that accountancy’s systems can’t be relied upon, according to Andersen. Deloitte could then issue a number of suggestions for how Andersen could improve upon its procedures, and Andersen would be required to respond, according to these reports, citing an Andersen spokesman. If Deloitte does issue a qualified review, it would be the first one ever since this review process began in 1978, say these reports.
Meanwhile, in what can only be described as a remarkable case of chutzpah, Enron on Sunday filed a $10 billion lawsuit against almost-merger partner Dynegy, alleging breach of contract after the Houston-based rival terminated its proposed deal.
Enron and on It Goes
Meanwhile, a number of companies have announced their exposure to the Enron collapse. Management at financial services company Principal Financial Group Inc. said the insurer will take about a $171 million hit from the Enron debacle, noting that the company would take a write-down during the fourth quarter. Managers at the Des Moines, Iowa-based Principal said that $92 million of the exposure is in secured issuances of Enron-related entities. Principle is also reviewing additional possible exposure of $50 million in investments with Enron-related entities.
Investment banker Bear, Stearns Cos. reported $69 million in exposure to Enron, including loans, letters of credit, and derivative transactions. Executives at Bear, Stearns said the exposures will not have a material effect on the company’s operations or financial condition.
Citigroup Inc. and J.P. Morgan Chase & Co., which were advising Enron on the Dynegy merger, are on the hook for a $900 million and $800 million respectively. Of that, it is estimated that Citigroup has a $500 million exposure, with Morgan on the line for $300 million. Moody’s Investors Service has announced that Citigroup’s exposure is “manageable” and will have no rating impact on the company.
Not surprisingly, some energy companies were also affected by the fallout of the Enron collapse. Managers at Tulsa, Oklahoma-based ONEOK Inc. said that the company’s exposure is about $40 million. That amount stems from commodity transactions primarily for storage management and natural gas production hedges.
Some companies have been hurriedly moving business away from Enron. Executives at Atmos Energy Corp., a Dallas-based natural gas utility, said that company would not be materially effected by Enron’s collapse. “Atmos has significantly reduced its business with Enron,” said CEO Robert W. Best. As of yet, the fall of Enron has yet to jeopardize any of the companies that do business with the Houston-based energy specialist.
Other Financing News
While the IPO market is tentatively reviving, the bond and convertible markets continue to thrive.
- For example, Young Broadcasting Inc., which operates 12 television stations, issued $250 million in seven-year senior notes in the private placement market. Rated B2 by Moody’s and B by Standard & Poor’s, its issue was priced at par to yield 8.50 percent, 440 basis points over comparable Treasurys. The offering was led by Deutsche Banc Alex. Brown and Wachovia Securities.
- Forest Oil Corp., an exploration and production company, issued $160 million in 10-year senior notes in the private placement market, up from an originally planned $150 million. J.P. Morgan was the sole lead underwriter. The underwriting was priced at par to yield 8 percent, or 325 basis points over Treasurys. The paper was rated Ba3/BB.
- Hollinger Participation Trust, a unit of Chicago-based newspaper publisher Hollinger International, added $140.5 million to the existing 12.125 percent senior notes due November 2010 in the private placement market. The notes were priced at $83 to yield 15.65 percent, a whopping 1091 basis points over Treasurys. The Hollinger debt was rated B3/B.
- KB Home, a Los Angeles homebuilder, issued $200 million in 7-year senior subordinated notes, led by Banc of America Securities. The Ba3/BB-minus issue was priced to yield 8.6875 percent, 417 points over Treasurys.
- Lyondell Chemical issued $393 million in 7-year senior secured notes in the private placement market, up from an originally planned $350 million. The notes were priced at par to yield 9.50 percent, or 493 points over Treasurys, and was rated Ba3/BB.
- Extreme Networks, provider of broadband network equipment, issued $175 million in 5-year subordinated convertible notes in the private placement market, led by Goldman Sachs. The unrated issue was priced at par to yield 3.5 percent with a conversion premium of 27 percent.
- In an investment-grade funding, John Deere Capital, a unit of Deere & Co., issued $150 million in 2-year notes, led by Banc of America Securities and Salomon Smith Barney. The notes were priced to yield 4.196 percent, or 135 points over comparable Treasurys, and was rated A2/A.
Pension Plan Blues
The defined-contribution pension plans of large corporations lost 8 percent of assets in 2000. This, according to a recent survey by the Committee on the Investment of Employee Benefit Assets, an affiliate of the Association for Financial Professionals. By comparison, defined-benefit plans of large corporations suffered a 3 percent decline in assets. Not surprisingly, the Association expects plan sponsors to do even worse in 2001.