Over the last few months, structured finance analysts have been gauging Enron Corp.'s bankruptcy and its technical impact on the various market segments, such as CMBS deals with Enron office space exposure, CDOs referencing Enron, as well as the ABCP market, which, at one point, had nearly $10 billion of Enron exposure (see ASR 12/10/01).
As Enron's financial arrangements come under scrutiny, some pros are predicting a backlash for structured finance markets similar to what happened with LTV Steel, when creditors challenged true-sale in efforts to seize securitized assets.
"As the Enron bankruptcy continues, the creditors are going to be looking for pots of cash," said Alex Roever, analyst at Banc One Capital Markets. "There's some systematic risk to securitization markets stemming from this. There was a lot of concern in the market last year from the LTV case. It's hard for me to imagine that, for something as large as Enron, there won't be some noise."
Roever has heard of at least two major accounting firms taking a close look at specific deal documentation related to Enron asset sales, "to make sure they've dotted their i's and crossed their t's."
At the time of bankruptcy, only about $1 billion in Enron assets appeared in the commercial paper market, said Sam Pilcer, head of ABCP at Moody's Investors Service. Apparently, the program sponsors had all but removed Enron from their conduits. What's left is essentially fully supported by the banks, so ABCP investors are left with bank risk.
So far, the Enron controversy have been tied to corporate finance techniques and balance sheet manipulation, specifically related to the limited partnership structures Enron had established to remove debt and other exposures from its balance sheet.
"Enron was unduly aggressive in getting this stuff off balance sheet," said another structured finance researcher. "The issue that arrives post-Enron is aggressive accounting practices, and really shouldn't impact the structured finance market', but privately structured, corporate financing techniques."
In December, the Big-Five accounting firms sent a petition to the Securities & Exchange Commission requesting clarity on "enhanced disclosures" that would supplement a corporation's 10-K filing. Specifically, the firms would like the SEC to issue an interpretive release addressing "liquidity and capital resources including off-balance-sheet arrangements, certain trading activities that include non-exchange-traded contracts accounted for at fair value; and relationships and transactions on terms that would not be available from clearly independent third parties."
According to a source at one of the firms, the petition is a direct response to the accounting issues spiraling out of the Enron catastrophe.
Meanwhile, in credit derivatives, Enron's failure has actually affirmed the market's efficiencies, said one CDS analyst.
"Considering that it was the largest event to hit the CDS market, the market is absorbing the Enron bankruptcy surprisingly well," the analyst said. "You haven't seen many lawsuits related to Enron credit default swaps, which was always a concern. I think it's pretty positive."
According to the analyst, most players in the CDS market had synthetic positions in Enron.
"It's taken some time, but the trades are unwinding pretty much without problem," an analyst said.