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Enron Mail |
Content-Transfer-Encoding: 7bit Return-Path: <vkaminski@aol.com< Received: from rly-za02.mx.aol.com (rly-za02.mail.aol.com [172.31.36.98]) = by air-za03.mail.aol.com (v83.29) with ESMTP id MAILINZA36-0112014053; Sat,= 12 Jan 2002 01:40:53 -0500 Received: from mail-s01.websys.aol.com (mail-s01.websys.aol.com [205.188.1= 48.242]) by rly-za02.mx.aol.com (v83.18) with ESMTP id MAILRELAYINZA26-0112= 014038; Sat, 12 Jan 2002 01:40:38 -0500 Received: from fortune-s05.websys.aol.com (fortune-s05.websys.aol.com [64.1= 2.33.230])=09by mail-s01.websys.aol.com (8.11.6/8.11.6) with ESMTP id g0C6e= YK16814=09for <vkaminski@aol.com<; Sat, 12 Jan 2002 01:40:34 -0500 (EST) Message-ID: <4524191.1010817634869.JavaMail.dynamo@fortune-s05.websys.aol.c= om< Date: Sat, 12 Jan 2002 01:40:34 -0500 (EST) From: vkaminski@aol.com To: vkaminski@aol.com Subject: Caught Off Balance Mime-Version: 1.0 Content-Type: text/html X-Mailer: Unknown (No Version) A colleague has sent you this article from Fortune (http://www.fortune.com = ). Reply to your colleague at vkaminski@aol.com=20 vkaminski@aol.com =3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D AGAINST THE GRAIN Caught Off Balance Bond sleuths were ahead on Enron. Now they have their sights on three othe= rs. Herb Greenberg Mon Jan 21 00:00:00 EST 2002 If you learn nothing else from the Enron mess, take this lesson to heart: = A company's inability to handle its debt can be its downfall--no matter ho= w much Wall Street likes its stock. Indeed, while earnings may be a window= to a company's psyche, the balance sheet is what gives you a truer pictur= e of its well-being. Bond analysts make a beeline to this crucial piece of= financial disclosure, paying special attention to a company's ability to = service its debt. And when the ratio of cash to debt plunges--watch out!= =20 The best balance-sheet snoops are often way ahead of the pack in finding s= igns of trouble. Sometimes, however, the big credit-rating firms, Standard= & Poor's and Moody's, which get paid by the companies they rate, are slow= off the mark--slower, as a rule, than independent bond-rating services li= ke Egan-Jones of Wynnewood, Pa., or research firms like New York-based Gim= me Credit. "We don't have the constraint of trying to keep a company happy= ," says Egan-Jones President Sean Egan, whose downgrade of Enron to junk b= eat the big guys by about a month. (To be fair, Moody's is revising how it= assesses companies, taking into account additional information that could= lead to a default. Standard & Poor's, for its part, argues that its exist= ing methods are adequate.)=20 Given the scope--and the surprise--of the Enron failure, it's worth asking= : Are there other companies out there that these aggressive independent cr= edit-rating agencies are flagging now? You can bet on it. We're not necess= arily talking future Enrons, but simply companies whose financial situatio= n is more dire than the market thinks. Certainly one where the alarm bells= are ringing loudly (and which--don't remind me--got a positive nod from t= his column a year ago) is Ford Motor. It's no secret that Ford is having s= erious problems, but you wouldn't know it from its credit rating, which is= still investment grade. Egan-Jones, however, labels it BBB-, a few notche= s lower than the other rating agencies do and just one step above junk. Th= at's where Egan-Jones thinks Ford will arrive within six months, as the sa= les boost from the much heralded 0% financing starts to wane and bad auto = loans pile up. Junk status raises the cost of borrowing and would be parti= cularly damaging for Ford, whose ability to cover its debt has been deteri= orating rapidly. Egan and other bond analysts measure this by calculating = a company's interest coverage ratio--pretax income plus interest expense = divided by interest expense.=20 The ratio, which varies widely by industry, is key to credit analysis. Ega= n calculates that Ford's interest coverage has tumbled from 2.2 in Septemb= er 2000 to just above 1 now. "That's akin to saying that nearly everything= you earn will have to be used to pay your interest expense, which doesn't= leave a lot of money to invest in the business," he says. Ford responds t= hat it's "disappointed" by the Egan-Jones rating; both S?and Moody's insis= t they haven't been laggards and that their ratings are appropriate.=20 Egan-Jones is even warier of computer maker Hewlett-Packard. Its credit pi= cture is as imperiled as its proposed Compaq merger, according to Egan-Jon= es--which has already tossed the tech giant's debt on the junk heap with a= rating of BB+, several notches below that of the major rating agencies. "= It's appropriate to view Hewlett-Packard on a stand-alone basis, which is = not particularly attractive," Egan says. "Today it is hard to name any bus= iness where it's the undisputed leader--even its printer business is being= attacked." Making matters worse: From October 2000, Hewlett-Packard's int= erest coverage has sunk steadily from 19 to just 6.6. (By contrast, IBM's = ratio, according to Egan-Jones, is 11.7.) Hewlett-Packard officials couldn= 't be reached for comment.=20 Finally, there's retailer Gap (another company this column once argued you= should never bet against, because of its miracle-working marketing genius= of a CEO, Mickey Drexler). While Gimme Credit's Carol Levenson says Gap's= balance-sheet condition is not yet critical, it's "not nearly as strong a= s it used to be." Egan-Jones points out that Gap's interest coverage ratio= has plunged from 27.3 down to 8.8 over the past four quarters. As a resul= t, the firm rates the retailer's debt one step above junk and a couple of = notches below that of both Standard & Poor's and Moody's ratings. Gap offi= cials say they have never "worked" with Egan-Jones and point to the retail= er's standing with the major rating agencies instead. The problem is, as E= nron proved, those agencies are not always the first to sound the alarm.= =20 http://www.fortune.com/indexw.jhtml?channel=3Dartcol.jhtml&;doc_id=3D205973= =20 Colleague at Fortunehttp://www.fortune.com
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