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 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.
• EDF credit measures are actual Letter ratings are for
probabilities, not credit scores. comparison purposes only--a
A company with a current EDF point of reference to improve
credit measure of 2% has a 2% interpretation of default
probability of defaulting within probabilities.
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.
February 2001
Skilling becomes president and chief
•executive officer of Enron.
Debt levels rise to $37.3 billion, a
•91% increase over previous 12-
month period
• 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 and Blockbuster cancel
video-on-demand deal.
• Company's asset volatility increases
to 19.03%
• EDF Credit Measure rises to 0.51%
May 2001
• Maharashtra State Electricity
Board, Dabhol power plant’s
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%
August 2001
• Skilling resigns as Enron
president and chief executive
officer, citing personal reasons.
Ken Lay returns to position of
chief executive officer.
EDF Credit Measure increases
• to 1.91%, equivalent to BB
rating
Oct. 8, 2001 Nov. 8, 2001
Enron agrees to sell Portland General to Northwest Natural Enron says it overstated earnings
•Gas Co. for $1.8 billion.
•dating back to 1997 by almost $600
million
• EDF increases to 2.05% EDF spikes to 16.64%, an almost
•70% increase in its default risk in
one week
Nov. 9, 2001
Enron also discloses a $1.2 billion charge against Enron agrees to a deal in which
shareholders’ equity relating to dealings with partnerships run •smaller rival Dynegy Inc. will buy
by chief financial officer Andrew Fastow. Enron for some $9 billion in stock.
• EDF Credit Measure is 1.98%, equivalent to BB As part of the deal Chevron Texaco
agrees to inject $1.5 billion in fresh
• Moody's agency rating on senior unsecured notes is Baa1 capital immediately.
Moody's follows announcement with
•
downgrade of company's senior
unsecured notes from Baa2 to Baa3
Oct. 22, 2001
EDF Credit Measure remains high at
•Enron says U.S. Securities and Exchange Commission is •16.04%, equivalent to CCC-
looking into transactions between Enron and the Fastow
partnerships.
• Share price falls to $20.65 Nov.20, 2001
• Market leverage rises to 63.74% •Enron discloses that a deterioration
in its credit ratings could accelerate
• EDF Credit Measure rises to 4.27% repayment of a $690 million loan.
The company subsequently
negotiates an extension of the loan.
•EDF Credit Measure reaches the
worst possible level: 20%
Oct. 24, 2001
• Fastow is replaced as chief financial officer by Jeff McMahon,
head of Enron’s industrial markets unit
Nov. 28, 2001
• Share price continues to decline, to $16.41 Major credit rating agencies
•
• EDF Credit Measure increases to 6.10%, an almost 5,000%
increase in risk from a year ago
downgrade Enron’s bonds to “junk”
status. Dynegy terminates its
agreement to buy Enron. Enron
temporarily suspends all payments,
other than those necessary to
Nov. 1, 2001 maintain core operations.
• J.P. Morgan and Salomon Smith Barney agree to provide an
additional $1 billion in secured credit. Market cap tumbles to •Market leverage is now 103%, rising
50% from the previous month
$8.9 billion, a 26% drop in just one week
• Asset volatility remains near 20%
Dec. 2, 2001 Default
• Market leverage is now almost 75%
• Enron files for Chapter 11
• EDF Credit Measure rises to 9.88%, equivalent to CCC+ bankruptcy and hits Dynegy with a
$10 billion breach of contract
• S&P agency rating is BBB lawsuit.
• KMV records the default