Enron Corp.

CredIt SensItIve Notes

By-
AmogI Ron
NeIu GurodIu
NIsIunL GoyuI
enda
W redIL SensILIve NoLes (SN)
W SN vs. sLundurd bond
W nron`s objecLIve In IssuIng LIe noLes
W Iy wouId nron oIIer Iower ruLe us compured
Lo ILs credIL sLundIng?
W RIsk & BeneIILs Lo nron
W RIsks & BeneIILs Lo InvesLors
W pecLed oss
W nvesL or noL InvesL?
nvesL or noL Lo
nvesL?
at Is CredIt SensItIve Note:
W A SN Is u debL InsLrumenL wIose puyoII Is
conLrucLuuIIy IInked Lo LIe credIL ruLIng oI LIe Issuer.
W A LypIcuI SN wouId be Issued wILI u IIed ruLe
scIeduIe sucI LIuL LIe Issuer wouId promIse Lo puy
predeLermIned coupons on LIe SN bused on
currenL credIL ruLIng.
W I LIe Issuer`s credIL ruLIng deLerIoruLes or Improves,
LIe coupon puymenLs wIII Increuse or decreuse
respecLIveIy.
W %Ie puyoII on u SN vurIes onIy wILI credIL ruLIng
cIunges und noL wILI InLeresL ruLes or spreud.
ow Is CSN dIfferent from Standard
bond:
Iuctor Stundurd
Bond
CSN
oupon RuLe WIed WVurIubIe, dependenL
upon redIL ruLIng
PrIce sensILIvILy WnLeresL ruLe RIsk,
WSpreud RIsk,
WDeIuuIL RIsk
WnLeresL RuLe RIsk,
WSpreud RIsk
AdvunLuges WNo downgrude rIsk WSIgnuIIng opporLunILy,
WPoLenLIuI upsIde guIn
DIsudvunLuges WNo sIgnuIIng
opporLunILy,
WHIgI IInuncIng cosL
WHIgI downsIde Ioss,
WompIIcuLed prIce
deLermInuLIon
Enron's objectIve In IssuIn te notes
W %o puy oII cosLIIer sIorL Lerm debL (InLeresL ruLe
1o.z1%).
W RecenL Increuse In credIL downgrude rIsk In
energy IndusLry.
W %o Iedge InvesLor`s rIsk uguInsL BO`s und
resLrucLurIng.
W %o reduce cosL on eLru covenunLs requIred Ior
BBB ruLIng bonds.
ExIbIt 2
W SLundurd devIuLIon oI Lreusury yIeIds decreuses wILI
muLurILy.
W SLundurd devIuLIon oI corporuLe bonds Increuses wILI
LIe IuII oI credIL ruLIngs
W Spreud sIows greuLer vurIubIIILy Ior Iower ruLed bonds
ExIbIt J
W HIgI correIuLIon beLween %reusury bond und corporuLe
bond.
W As muLurILy Increuses, LIe correIuLIon beLween LIe
yIeIds Increuses Ior LIe sume bond ruLIng.
W As LIe credIL ruLIng IuIIs, LIe correIuLIon beLween LIe
yIeIds decreuses.
ExIbIt 4
W ow correIuLIon beLween yIeIds oI Lreusury bonds und
credIL spreuds oI IIgI ruLIng corporuLe bonds.
W HIgI correIuLIon beLween yIeIds oI Lreusury bonds und
credIL spreuds oI Iow ruLIng corporuLe bonds.
W redIL spreuds ure correIuLed Lo credIL ruLIngs, wILI
IIgIesL correIuLIon beLween LIe neuresL bond ruLIngs.
ExIbIt 5
W As % yIeId Increuses (decreuses), credIL spreuds oI
corporuLe bonds decreuses (Increuses).
W %Ie correIuLIon Ior LIIs cIunge Is IIgIer us LIe
muLurILy Increuses or LIe credIL ruLIng decreuses.
ExIbIt 6
W Recovery RuLe: PercenLuge oI Iuce vuIue receIved by LIe bondIoIders
wIen u bond deIuuILs.
W ncreusIng (DecreusIng) recovery ruLe resuILs In decreusIng (IncreusIng)
spreuds us LIe cupILuI uL rIsk Is reduced.
W %Iere Is no Lrend seen In LIe correIuLIon beLween LIe debL cIuss und
spreuds over %-os.
W However, LIIs correIuLIon Is sLrongesL beLween Iower ruLed Issues und LIe
IeusL senIor debL Issues

0
-
t

V
u
l
o
0
#0cov0ry #ut0
would Enron offer lower rate as
compared to Its credIt standIn:
.oo%
q.oo%
1o.oo%
11.oo%
1z.oo%
1.oo%
1q.oo%
1.oo%
AAA AAA AAA BBB BBB B or Iess
SN
urkeL RuLes
SLundurd bond
#Isks E 8enefIts to Enron:
W BeneIILs:
ower coupon ruLe uL LIe currenL ruLIng
SendIng LIe posILIve sIgnuI Lo LIe murkeL
Reduced cosL oI cupILuI
PossIbIIILy oI IurLIer reducLIon In coupon ruLe us
LIe credIL ruLIng Improves
W RIsks:
HIgIer coupon ruLe In cuse oI Iower credIL ruLIng.
nsLrumenL uccepLunce rIsk
nsLrumenL prIcIng rIsk
Expected Loss
#utings Pro-u-ility oI
Trunsition
Irom BBB uIt0r
g y0urs
Comolutiv0
d0Iuolt
pro-u-iliti0s uIt0r
g y0urs {Moody's)
Ixp0ct0d Loss to
Bond Hold0rs uIt0r
g y0urs
AAA o.6% o.1o% 6
AA 6.o% o.1% ;,o;
A z.zo% o.q;% ;o,o
BBB z6.;1% 1.qq% 6,
BB 1q.zq% 1o.zz% qq,6;
B 1.oq% z6.;q% z,z;q,;
.;q% 6.6z% 1,;,qo
#0cov0ry #ut0 Ior So-ordinut0 0-t g%
DebL VuIue 1oo,ooo,ooo
nvest or not to nvest: N7EST
W Hedged uguInsL LIe downsIde rIsk (DeIuuIL
rIsk)
W nLeresL coveruge ruLIo Ius Increused Irom
-1 1q; Lo z.16 In urcI, 1qq.
W BeLLer opLIon LIun LIe oLIer BBB ruLed
bonds uvuIIubIe.