|
|
Enron Mail |
=09[IMAGE]=09[IMAGE]=09 =09[IMAGE]=09=09 [IMAGE]=09[IMAGE]=09[IMAGE]=09 =09=09[IMAGE]=09 =09Were You Ready for the Enron Credit Collapse? When Could You Have Known?= What Could You Have Done?=09=09 =09[IMAGE]=09=09 [IMAGE]=09 The fall of Enron, the fall of the Cal-PX and the fall of the fi= rst giant, PG&E, have each been significant wake up calls to the industry.= The Power industry is an uncertain and volatile market rife with price,= regulatory and other market risks. To the unprepared it may seem that di= saster strikes unexpectedly and without warning. In reality, disaster is n= ever all that sudden, although our realization of it may be sudden, and as= such, unprepared. Looking closely at the most recent fall, that of Enron,= warning signs have been present for some time indicating that all was not= right with one of the world's leading energy companies. The current clamo= ring of credit agencies and financial institutions is akin to the reaction= a flock of birds has after one of their own has been killed by a predator= , too little too late. The market participants that retain their composur= e are those that can foresee events coming. There are tools and methodolog= ies available to the market savvy that allow for the mitigation of credit = and other risks. Still, application of these tools requires significant kn= owledge and skill, but more so, the rigor, policy and corporate resolve to= use the tools available. Access to a utility specific credit analysis an= alytic tool like ZE PowerGroup's Credit Risk Manager (CRAM) application wo= uld have provided preemptive warning signals. As the share price dropped = a score reflecting low solvency would have prompted a reduction of Enron c= redit limit, ultimately flagging the account early on, months prior to Enr= on's current situation. Each downgrade by an agency would have generated a = lower credit limit - ultimately flagging the account when it hits the firs= t unacceptable level. Consistent downgrades would have put them on a "cre= dit watch list". When the financial statement was pulled/declared inadequa= te, corporate credit policy could have dictated the cessation of any furth= er trading with ENRON without security. The demise of Enron was months = in the making; average stock prices have been falling from the start of 20= 01. Interested parties watched as credit rating agencies such as Moody's, = Fitch and Standard & Poor's decreased Enron's credit outlook. These declin= ing credit ratings signaled the beginning of the end for Enron as corporat= e debt was called again and again. The asset light corporation was unable = to stave off the downward credit spirals that ultimately lead to bankruptc= y. At its height, Enron and its EnronOnline trading site were averaging = over $3 billion in trade transactions per day. Enron was once the country's= top buyer and seller of natural gas, and the No. 1 wholesale power market= er. The company operated a 25,000-mile gas pipeline system, and marketed = and traded metals, paper, coal, chemicals, and fiber-optic bandwidth. Enro= n's bankruptcy is recorded as the largest case in history, encompassing $6= 2 billion in assets and affecting 21,000 employees. Its shares went from $= 85 to $0.25 in a span of 12 months. CRAM would not have been able to predi= ct a low of $0.25/share (nor could anybody for that matter) but the system= would have capitalized on all signs and provided the proper warning signa= ls. The figure below shows an example of how the CRAM rating of Enron base= d on a sample credit risk policy has changed over the last year. [IMAGE] = What is interesting to Note is that the CRAM system, in the last year, ha= s never rated Enron highly. The Table below describes the CRAM scoring and= rating system. Please note that the table is only a sample as could be de= rived for a small public utility. CRAM is a tool that enables the developm= ent and implementation of a corporate credit policy; it is not the policy.= [IMAGE] Based on this specific rating system, Enron never scored above 18= 50, putting it into an N3 CRAM rating (moderate risk). The first CRAM cred= it alert would have come right in the beginning of the year in January wh= en the rating would have been downgraded to N4 and a much higher risk of d= efault, i.e. market reactive. By July, and with a CRAM rating of N6, Enron= would have been rated as a high risk with insufficient financial strength= ; Trade with Enron would have been severely curtailed. This down grading w= ould have called for possible contract adjustments and demand for collater= al, depending on whether the corporation had safeguards in its credit poli= cy and contracting. Before December, CRAM had rated Enron as an NN, or a p= arty with which no trade can occur. By using the CRAM, transactions with = Enron would have demanded caution from throughout 2001 and there would hav= e been severe constraints on contract amount, type and duration. As can be= seen by the scoring table, the CRAM would have progressively, and aggress= ively reduced exposure to Enron over the year to a point where the largest= contract would have been small, manageable and for short duration. The co= ntinued downgrades would have placed Enron on the Credit Watch List and tr= ansactions would have required manager approval and most likely collateral= . Having a rigorous credit policy, and the means to implement it, could ha= ve minimized if not avoided any credit risk exposure to Enron, and in the = best case scenario allowed the corporation to unwind high-risk deals as cr= edit strength of the counter-party fell. CRAM primarily determines counte= r-party credit limits as well as clients' own credit (transactional) limit= ations. Through a series of rating-agency evaluations, user defined criter= ia and detailed counter-party financial profiles, the system dynamically c= reates and tracks counter-party credit and transactional limits to manage = and minimize clients' credit risk exposure. CRAM utilizes these inputs to = assign a client-specific credit rating, monetary trade limits and maximum = contract lengths for all counter-parties. These limits are used to ensure = corporate credit and risk tolerances are not jeopardized prior to authoriz= ation being given to execute a trade. As an independent tool, the applicat= ion immediately enables clients to determine their existing credit risk ex= posure and begin ongoing, near real time, counter-party monitoring and ass= essment processes. The application's effectiveness is further enhanced whe= n integrated with the full suite of ZE PowerTools applications. [IMAGE] = ZE PowerGroup offers a variety of services to enhance client credit analy= sis and credit mitigation. CRAM is only one tool that ZE PowerGroup offers= . We also develop credit policies, provide monthly market and credit monit= oring, conduct operational audits, forecast forward natural gas and electr= icity prices and a host of other tools. We encourage you to contact us to= discuss your credit and portfolio needs. We can provide you a ready fit p= roduct or develop customized products to meet your specific requirements. = Please contact: Paul Seo, Marketing Manager paul@ze.com , 604-244-146= 9 Aiman El-Ramly, Vice President Marketing and Business Development aiman= @ze.com , 604-244-1654 For more information on other services and produc= ts go to www.zepowertools.com =09[IMAGE]=09 =09=09[IMAGE]=09 =09[IMAGE]=09=09 =09Link to www.zepowertools.com =09=09 [IMAGE]=09[IMAGE]=09[IMAGE]=09 =09=09[IMAGE]=09 =09=09[IMAGE]=09 =09=09You received this newsletter because your email address is on our ma= iling list. We hope you find our mailings useful. However, if you'd like y= our name taken off the mailing list, you can do so by replying to this ema= il with UNSUBSCRIBE in the subject line. =09
|