Following Enron Corp.'s filing for bankruptcy protection early last week, researchers began tallying the impacts of the largest-ever U.S. bankruptcy on the various structured finance markets globally, including both cash and synthetic collateralized debt obligations, derivatives and CMBS.
Quite visibly, Enron's distressed debt has negatively impacted several synthetic CDOs referencing the Texas energy concern. According to Standard & Poor's, Enron appears in roughly 50 credit derivative transactions, a large portion of which are investment-grade synthetic CDOs, with a total notional value of nearly $80 billion (all transactions). Total exposure to Enron in these transactions is in the neighborhood of $3.3 billion, S&P said.
An attorney specializing in synthetic deals guessed that, if he were to look at the last ten investment-grade synthetic CDOs he's worked on, five would include Enron in the reference pool.
"They were considered a good candidate for the diversification pool," the lawyer said.
Fitch stated last week that it was looking at 20 transactions globally, the majority of which are synthetic CDOs with exposure to Enron. The rating agency placed tranches from three deals on watch for downgrade.
Fitch also estimated that Enron's credit makes up as much as 1% of the global derivatives market.
Interestingly, Enron is not only a referenced entity, but, as part of its hedging activities, via Enron Credit, it was a seller of protection in an undetermined number of transactions. The protection buyers in those deals are likely to be seeking replacement protection, which could push CDS spreads out in the near term, one bank researcher noted.
As reported last week in Investment Dealers' Digest, a sister publication of ASR, the cost of credit protection spiked most significantly on Enron's largest lenders, namely J.P. Morgan Chase and Citigroup, immediately following the company's falling below investment grade, although that widening was considered "knee jerk," and those spreads came back in within a day or so, sources said.
Interestingly, until Enron officially filed for Chapter 11 bankruptcy protection, the derivatives market was facing perhaps the ultimate incarnation of the "restructuring as a credit event" fiasco, whereby the inconsistent language written into credit default swaps of yesteryear had ignited legal debate over what is and is not a credit event.
"By filing for bankruptcy, they took all of the excitement out of whether it will trigger a restructuring definition or not," said Adam Glass, lawyer at Sidley Austin Brown & Wood. "Just about every single credit derivative will have bankruptcy as one of those core credit events."
One issue that still may arise, however, is clarity on the deliverability of zero-coupon and convertible bonds, said a bank researcher, as Enron does have a zero coupon/convertible to deliver.
"I suspect there will be a little bit of a food fight over accepting the deliverability of zeros and converts," the researcher said. "It's something that I think is inevitable."
Beyond the credit derivatives market, Enron's failure is impacting the commercial mortgage-backed securities market, putting pressure on transactions with office building exposure to Enron.
According to Banc ofAmerica's Real Estate Weekly, Enron accounts for about 4.1% of rents flowing into TRIZE 2001-TZHA. "From a broader perspective, Enron's default will cause some dislocations in the Houston office market," BofA writes. Enron occupies as much as 9% of Houston central business district (CBD) space, and was expected to move into a new 1.2 million square foot headquarters in 2002. "While the move would have added space to the market regardless of bankruptcy, the addition of new supply just as a major tenant vacates space will likely strain the market."