HOUSTON – Enron Corp.'s shares fell near a seven-year low on Monday, as the limping energy giant said it was lobbying banks for a new credit line and a rating agency chopped Enron's senior unsecured debt to two notches above junk status.
The ratings cut by Moody's Investors Service, which warned it could slash that rate again and also Enron's short-term debt status, was the latest sword thrust into what was once the raging bull of the energy trading arena.
The company's stock has been cut in half and has bled out some $15 billion in market capitalization as a series of increasingly negative disclosures about off-balance-sheet deals with two partnerships has trickled out.
Investors seeking clarity in the deals and fearing the potential for other debacles with similar partnerships have abandoned Enron, which has firmly declined to provide further details.
On Monday, Enron shares were sent back in time to 1994, the last time they traded below $14. The shares closed at $1.69, or 10.9 percent lower, at $13.95, on the New York Stock Exchange.
Seeking More Credit
Enron on Monday confirmed it was seeking additional credit lines after tapping its $3.3 billion lines last week, but declined to say how much it was asking its banks to extend.
"We want to restore investor confidence and nothing instills confidence like cash," Enron spokesman Mark Palmer said. That should leave Enron with a net cash position of $1.2 billion, Moody's said.
Both moves, as well as Standard & Poor's revision last week of Enron's credit outlook to negative from stable, raises the specter of a credit crunch for North America's largest gas and electricity trader. A credit downgrade by all three agencies would add tremendous cost to Enron's key trading business as its fellow marketers and traders demand more collateral.
"Certainly to some extent a lot of what we will do with them is tied to their credit rating and it is under pressure at the moment," Marce Fuller, chief executive of Atlanta-based electricity trader and marketer Mirant Corp., told Reuters. "If their credit rating begins to deteriorate, then obviously that would require some changes in terms of those agreements."
Worse yet, if all three rating agencies drop Enron below investment grade and its stock stays at current levels, the company would be forced to issue more shares and dilute its stock further.
Acts of Desperation?
Despite several actions it has taken to restore investor confidence, Enron has done little to address its credibility and to increase the clarity of its accounting. So investors and observers have been skeptical of anything emanating from Enron's headquarters in the heart of Houston's energy trading district.
"We are not of the opinion that drawing down all of one's backup bank lines is a demonstration of financial strength, but instead it's an act of desperation," said analyst Carol Levenson of independent research firm Gimme Credit.
Moody's said its cut was "prompted by the deterioration in Enron's financial flexibility," since the company set off a stock freefall after reporting its first quarterly loss in more than four years on Oct. 16.
The avalanche began when Enron said it would take $1.01 billion in writedowns and charges for failed investments against its third quarter earnings.
Even more damning to Enron's stock than the loss was its fleeting admission during a conference call that it had to write down $1.2 billion in shareholder equity. The equity loss was Enron's cost for extracting itself from partnerships in which its former chief financial officer had been the general partner.
The U.S. Securities and Exchange Commission has begun an inquiry into any possible conflict of interest those partnerships could have raised, since former Enron CFO Andrew Fastow earned millions in management fees in his role as general partner in those arrangements. Enron forced Fastow out in favor of former treasurer Jeff McMahon last Wednesday in a bid to restore investor confidence.