EDF Case Study: Enron In the U.S., a record 255 publicly traded companies with assets totaling $258.

5 billion filed for bankruptcy in 2001. Until the WorldCom bankruptcy, Enron was the biggest American corporate bankruptcy ever.
Vertical scale is logarithmic Seemingly small movements for high-risk companies can be very substantial. EDF credit measures are actual probabilities, not credit scores. A company with a current EDF credit measure of 2% has a 2% probability of defaulting within the next twelve months. That is, out of 100 companies with a 2% EDF credit measure, we would expect, on average, that 2 would default over the next twelve months. Also, a company with a 2% EDF credit measure is 10 times more likely to default than a firm with a 0.20% EDF credit measure. Letter ratings are for comparison purposes only--a point of reference to improve interpretation of default probabilities.

EDF credit measures range from a low of 0.02% to a high of 20% in one basis-point increments. A basis point = 1/100 of a percentage point.

February 2001 Skilling becomes president and chief executive officer of Enron. Debt levels rise to $37.3 billion, a 91% increase over previous 12month period

Oct. 8, 2001 Enron agrees to sell Portland General to Northwest Natural Gas Co. for $1.8 billion.

EDF increases to 2.05%

Share price falls to $68.50 Oct. 16, 2001 EDF Credit Measure climbs to 0.35% Enron reports its first quarterly loss in over four years after taking charges of $1 billion on poorly performing businesses.
March 2001 Enron also discloses a $1.2 billion charge against shareholders equity relating to dealings with partnerships run by chief financial officer Andrew Fastow.

Nov. 8, 2001 Enron says it overstated earnings dating back to 1997 by almost $600 million EDF spikes to 16.64%, an almost 70% increase in its default risk in one week

Enron and Blockbuster cancel video-on-demand deal. Company's asset volatility increases to 19.03% EDF Credit Measure rises to 0.51%
May 2001

EDF Credit Measure is 1.98%, equivalent to BB Moody's agency rating on senior unsecured notes is Baa1
Oct. 22, 2001 Enron says U.S. Securities and Exchange Commission is looking into transactions between Enron and the Fastow partnerships.

Maharashtra State Electricity

Nov. 9, 2001 Enron agrees to a deal in which smaller rival Dynegy Inc. will buy Enron for some $9 billion in stock. As part of the deal Chevron Texaco agrees to inject $1.5 billion in fresh capital immediately. Moody's follows announcement with downgrade of company's senior unsecured notes from Baa2 to Baa3 EDF Credit Measure remains high at 16.04%, equivalent to CCC-

Board, Dabhol power plants sole customer, stops buying power in a dispute with Enron over pricing.

Market leverage increases to 45.84% EDF Credit Measure increases to 1.14%

Share price falls to $20.65 Market leverage rises to 63.74% EDF Credit Measure rises to 4.27%

Oct. 24, 2001 financial officer Fastow is replaced as chiefmarkets unit by Jeff McMahon, head of Enrons industrial

Nov.20, 2001 Enron discloses that a deterioration in its credit ratings could accelerate repayment of a $690 million loan. The company subsequently negotiates an extension of the loan. EDF Credit Measure reaches the worst possible level: 20%

August 2001

Skilling resigns as Enron president and chief executive

Share price continues to decline, to $16.41 EDF Credit Measure increases to 6.10%, an almost 5,000% increase in risk from a year ago
Nov. 1, 2001 to J.P. Morgan and Salomon Smith Barney agreecap provide an additional $1 billion in secured credit. Market tumbles to $8.9 billion, a 26% drop in just one week

officer, citing personal reasons. Ken Lay returns to position of chief executive officer. EDF Credit Measure increases to 1.91%, equivalent to BB rating

Nov. 28, 2001 Major credit rating agencies downgrade Enrons bonds to junk status. Dynegy terminates its agreement to buy Enron. Enron temporarily suspends all payments, other than those necessary to maintain core operations. Market leverage is now 103%, rising 50% from the previous month

Asset volatility remains near 20% Market leverage is now almost 75% EDF Credit Measure rises to 9.88%, equivalent to CCC+ S&P agency rating is BBB

Dec. 2, 2001 Default

Enron files for Chapter 11 with a bankruptcy and hits Dynegy

$10 billion breach of contract lawsuit.

KMV records the default