enron mentions - 11 / 19 / 01 headed for a fall ; companies issued special zero - coupon bonds , assuming they ' d never have to pay them off . now shareholders could be on the hook for a $ 65 billion tab .
fortune magazine , 11 / 26 / 01
manager ' s journal : what enron did right
the wall street journal , 11 / 19 / 01
j . p . morgan wins ( by not losing as much )
the wall street journal , 11 / 19 / 01
german bank is in talks with enron to buy a unit
the new york times , 11 / 19 / 01
bond boom isn ' t likely to lift economy as corporations swap old debt for new
the wall street journal , 11 / 19 / 01
preview / week of nov . 19 - 25 investors looking for answers in enron filing
los angeles times , 11 / 19 / 01
companies companies issued special zero - coupon bonds , assuming they ' d never have to pay them off . now shareholders could be on the hook for a $ 65 billion tab .
janice revell
11 / 26 / 2001
fortune magazine
time inc .
131
( copyright 2001 )
it was an irresistible proposition : borrow billions of dollars , pay no interest , reap millions in tax breaks , and then wait for the debt to simply disappear . that was the promise of zero - coupon convertible bonds , and companies from enron to merrill lynch binged on what seemed like free money .
but , of course , there was a catch : for this scenario to play out , a company ' s stock price had to rise sharply - - and quickly . that ' s because investors bought the bonds in the hope of converting them into equity - - if the stock tanked , the bonds would no longer be worth converting . so to make them more attractive to buyers , companies had to build in an escape hatch : if the stock price failed to rise sufficiently , investors could " put " ( that is , sell ) the bonds back to the company - - in many cases , after just one year .
and that ' s exactly what ' s about to happen - - to the tune of some $ 65 billion over the next three years . stock prices have fallen so far that for at least half of these special hybrids , the prospect of conversion is now absurd . it simply won ' t happen . so bondholders are looking to get their money back the first chance they can . and because of the put feature , that is possible . suddenly companies like tyco , comcast , and dozens more are on the hook for billions of dollars in debt and interest they thought they ' d never have to pay .
that could be very bad news for shareholders of these companies . after all , they ' re the ones who are going to be picking up the tab when all that debt comes due . huge chunks of cash will disappear from balance sheets to repay bondholders . companies without enough cash - - and the majority fall into this camp - - are likely to face skyrocketing interest charges when they borrow money anew . that means sharply reduced earnings . especially at risk are investors in companies with poor credit ratings - - prime candidates for killer refinancing costs . some companies may even be forced to issue stock to pay off the debt , creating significant shareholder dilution , especially at current depressed prices . to make matters worse , this is happening at a time when the economy is barreling downhill and corporate profits are already shrinking . " this is a ticking time bomb , " warns margaret patel , manager of the pioneer high yield bond fund , a top - performing junk fund .
the seeds of this mess were sown in mid - 2000 , when the stock market started to falter . companies in search of capital balked at the thought of selling stock while their share prices were struggling . zero - coupon convertible bonds presented an attractive alternative because companies didn ' t have to make cash interest payments on the bonds ( hence the name " zero " ) . instead issuers offered an up - front discount - - for instance , investors would buy a bond for $ 700 and collect $ 1 , 000 when it matured .
companies also gave investors the right to convert the bonds into a fixed number of common shares . but the bonds were structured so that conversion would make sense only if the stock price rose significantly - - in many cases , by more than 50 % . with that protective feature ( called the conversion premium ) , zeros took off . corporate issuers would pay no interest , and once their stock prices had climbed back to acceptable levels , the debt would be swept away into equity . " if the bonds are converted , it ' s a home run for everybody , " says jonathan cohen , vice president of convertible - bond analysis at deutsche bank .
that four - bagger , of course , depends entirely on the stock price rising . if it doesn ' t , the bondholders , armed with that handy put feature , can simply sell the bonds back to the company . great for bondholders , but not so hot for the company or its shareholders . but , hey , what are the odds of that happening ? " cfos and ceos believe that their stock will just continue to go up , " says cohen . " they don ' t worry about the bond getting put . "
if all this seems a little complicated , that ' s because it is . a real - life example should help . california - based electric utility calpine issued $ 1 billion in zeros in april to refinance existing debt . at the time , the company ' s stock was trading at about $ 55 a share - - severely undervalued in the opinion of company management . " we really didn ' t want to sell equity at that point , " says bob kelly , calpine ' s senior vice president of finance . so the company instead opted to sell zeros , setting the conversion premium at a hefty 37 % .
still , with no cash interest payments and a stock price that had to rise significantly to make conversion worthwhile , the bonds weren ' t exactly a screaming buy for investors . so calpine added the put feature : investors could sell the bonds back to the company after one year at the full purchase price , eliminating any downside risk .
things haven ' t exactly worked out as management had hoped . the stock has since plummeted to $ 25 , and it now has to triple before conversion makes sense . so it ' s looking as though calpine will be liable for the $ 1 billion in borrowed money when investors get the chance to put the bonds this april . there ' s also the refinancing cost . according to kelly , calpine ' s borrowing rate could run in the neighborhood of 8 . 5 % - - an extra $ 85 million per year in cash . " obviously , nobody plans for their stock to go down , " kelly says . " i don ' t think there was one person around who thought the bond would be put . "
calpine ' s potential costs are particularly high because its credit rating is straddling junk . " if you are a borderline investment - grade company , a financing of this nature is not necessarily the most appropriate thing in the world , " notes anand iyer , head of global convertible research at morgan stanley . the problem is , there are a slew of companies with far worse credit ratings out there : jeff seidel , credit suisse first boston ' s head of convertible - bond research , estimates that about half of all zeros outstanding fall into the junk category . and others are at risk of having their ratings downgraded before the put date . today , with junk yielding as much as 5 1 / 2 percentage points above bonds rated investment grade , refinancing can be a pricey proposition .
contract manufacturer solectron is one that could well get hit by the high price of junk . it has $ 845 million in zeros that it will probably have to buy back this january , and another $ 4 . 2 billion coming down the pike over the next couple of years . because of slower - than - expected sales , the company was recently put on negative credit watch by three rating agencies . and if solectron ' s credit is downgraded , the zeros would slide into junk status , a situation that could cost the company - - and its shareholders - - tens of millions of dollars in refinancing charges .
refinancing isn ' t the only worrisome cost associated with these zeros . companies pay hefty investment banking fees to sell their bonds - - up to 3 % of the amount raised . if the debt is sold back , many will have spent millions for what essentially amounted to a one - year loan . " they ' re getting bad advice , " claims one banker who didn ' t want to be named . " look at the fee the banker earned and look at the kind of financing risk the company got into . "
as if those potential consequences were not scary enough , shareholders can also get whacked when the bonds are first issued . that ' s because some 40 % are bought by hedge funds , which short the company ' s stock ( sell borrowed shares with the intention of buying them back at a lower price ) at the same time that they buy the bonds . if the stock goes down , the shorts make money from their position . if it goes up , they profit by converting the bond to stock . this hedging strategy almost always causes the stock to plummet , at least for a while . grocery chain supervalu , for example , recently lost 10 % of its market cap the day it announced it was issuing $ 185 million in zeros .
despite all the pitfalls , the love affair with such pollyanna bonds continues , thanks in large part to the slick tax and accounting loopholes they provide . in fact , the hit on earnings per share can be the lowest of any form of financing . even better , thanks to a wrinkle in the tax code , companies can rake in huge tax savings by deducting far more interest than they ' re actually paying . all they have to do is agree to pay small amounts of interest if certain conditions prevail . verizon communications , for instance , would pay 0 . 25 % annual interest on its $ 3 billion in zero bonds if its stock price falls below 60 % of the issue ' s conversion price . in the eyes of the irs , oddly , that clause enables the company to take a yearly interest deduction , for tax purposes , of 7 . 5 % - - the same rate it pays on its regular debt . ( why ? trust us , you don ' t want to know . ) that adds up to an annual deduction of more than $ 200 million , even if verizon never shells out a dime in interest . not surprisingly , more than half of the zeros issued in 2001 contain similar clauses . " it ' s an incredible deal for them , " says vadim iosilevich , who runs a hedge fund at alexandra investment management . " not only are they raising cheap money , they ' re also doing tax arbitrage . "
so despite the enormous risks to shareholders , companies continue to issue zeros at a steady clip : according to convertbond . com , seven new issues , totaling $ 3 . 5 billion , have been sold since oct . 1 alone . " i think the power of the tax advantage is going to keep them around , " says csfb ' s seidel . call it greed or just blind optimism that the markets will recover quickly - - it doesn ' t really matter . either way , it ' s the shareholders who ' ll be left paying the bill .
feedback : jrevell @ fortunemail . com
the bill comes due
companies issued convertible zeros , with put features , when the stock market soured . now repayment looms .
1999 2000 2001 2002 2003 2004
amount issued , $ 5 . 2 $ 19 . 6 $ 37 . 5 in billions
amount puttable , $ 2 . 4 $ 2 . 6 $ 4 . 8 $ 22 . 0 $ 19 . 1 $ 24 . 0 in billions
source : convertbond . com
when zero is a negative number
the danger posed by convertible zero bonds depends on a number of factors , according to morgan stanley ' s convertbond . com : the size of the bond , the put date , the company ' s credit rating and cash on hand , and how far the stock must rise for the bond to convert to equity .
[ a ] date of put [ b ] amount owed ( millions ) [ c ] cash on hand [ 2 ] ( millions ) [ d ] stock price as of 11 / 09 / 01 [ e ] % below conversion price
company bond rating [ 1 ] our risk assessment [ a ] [ b ] [ c ] [ d ] [ e ] tyco 11 / 17 / 01 $ 3 , 500 $ 2 , 600 $ 54 . 00 49 % investment grade not a problem - - for now . the conglomerate has cash to pay for bonds put this november . another $ 2 . 3 billion is puttable in 2003 .
solectron 1 / 27 / 02 $ 845 $ 2 , 800 $ 13 . 25 155 % investment grade in the danger zone . may be downgraded to junk if results don ' t improve . has additional $ 4 . 2 billion at risk in 2003 and 2004 .
calpine 4 / 30 / 02 $ 1 , 000 $ 1 , 242 $ 25 . 50 180 % inv . grade / junk possibly a pricey tab . on the border between investment grade and junk , the energy company faces high refinancing charges .
pride international 1 / 16 / 03 $ 276 $ 176 $ 12 . 50 148 % junk may need to drill for cash . the oil services company already has a heavy debt load in addition to its zeros .
western digital 2 / 18 / 03 $ 126 $ 201 $ 4 . 25 547 % junk hard drive ahead . the tech outfit has already paid down some of its zeros by issuing stock . more dilution possible .
brightpoint 3 / 11 / 03 $ 138 $ 67 $ 3 . 25 609 % junk watch out . this mobile - phone distributor plans to repurchase the bonds and is likely to incur high refinancing charges .
aspect commun . 8 / 10 / 03 $ 202 $ 134 $ 2 . 00 1 , 016 % junk the credit rating of this unprofitable call center company is near the lowest grade of junk . high alert !
enron [ 3 ] 2 / 7 / 04 $ 1 , 331 $ 1 , 000 $ 8 . 50 1 , 413 % investment grade very risky . among enron ' s myriad woes , its debt is on the verge of being downgraded yet again . it ' s already behaving like junk .
verizon 5 / 15 / 04 $ 3 , 270 $ 3 , 000 $ 50 . 00 70 % investment grade verizon faces little risk because of its strong credit rating and the long lead time on its put dates .
merrill lynch 5 / 23 / 04 $ 2 , 541 $ 20 , 000 $ 49 . 00 124 % investment grade also not yet a problem . this underwriting leader made sure its own zeros could not be put for three years .
[ 1 ] based on ratings from moody ' s and standard calpine had a split rating at press time . [ 2 ] as of most recently reported financial results . [ 3 ] now expected to merge with dynegy .
quote : contract manufacturer solectron is one zero - bond issuer that could well get hit hard . stocks have fallen so far that for at least half of all bonds out there , the prospect of conversion is absurd .
b / w illustration : illustration by david suter
copyright ? 2000 dow jones & company , inc . all rights reserved .
manager ' s journal : what enron did right
by samuel bodily and robert bruner
11 / 19 / 2001
the wall street journal
a 20
( copyright ( c ) 2001 , dow jones & company , inc . )
this is a rough era for american business icons . subject to the vagaries of age ( jack welch ) , product failure ( ford / firestone tires ) , competition ( lucent , at & t ) , technology ( hewlett - packard and compaq ) , and dot - bomb bubbles ( cmgi ) , managers and their firms remind us that being an icon is risky business . the latest example is enron , whose fall from grace has resulted in a proposed fire sale to dynegy .
once considered one of the country ' s most innovative companies , enron became a pariah due to lack of transparency about its deals and the odor of conflicts of interest . the journalistic accounts of enron ' s struggles drip with schadenfreude , hinting that its innovations and achievements were all a mirage .
we hold no brief regarding the legal or ethical issues under investigation . we agree that more transparency about potential conflicts of interest is needed . high profitability does not justify breaking the law or ethical norms . but no matter how the current issues resolve themselves or what fresh revelations emerge , enron has created an enormous legacy of good ideas that have enduring value .
- - deregulation and market competition . enron envisioned gas and electric power industries in the u . s . where prices are set in an open market of bidding by customers , and where suppliers can freely choose to enter or exit . enron was the leader in pioneering this business .
market competition in energy is now the dominant model in the u . s . , and is spreading to europe , latin america , and asia . the winners have been consumers , who have paid lower prices , and investors , who have seen competition force the power suppliers to become much more efficient . the contrary experience of california , the poster child of those who would re - regulate the power industry , is an example of not enough deregulation .
- - innovation and the " de - integration " of power contracts . under the old regulated model of delivering gas and electricity , customers were offered a one - size - fits - all contract . for many customers , this system was inflexible and inefficient , like telling a small gardener that you can only buy manure by the truckload . enron pioneered contracts that could be tailored to the exact needs of the customer .
to do this , enron unbundled the classic power contract into its constituent parts , starting with price and volume , location , time , etc . , and offered customers choices on each one . again , consumers won . enron ' s investors did too , because enron earned the surplus typically reaped by inventors . arguably , enron is the embodiment of what economist joseph schumpeter called the " process of creative destruction . " but creative destroyers are not necessarily likable , pleasant folks , which may be part of enron ' s problem today .
- - minimization of transaction costs and frictions . enron extended the logic of de - integration to other industries . an integrated paper company , for instance , owns forests , mills , pulp factories , and paper plants in what amounts to a very big bet that the paper company can run all those disparate activities better than smaller , specialized firms . enron argued that integrated firms and industries are riddled with inefficiencies stemming from bureaucracy and the captive nature of " customers " and " suppliers . " enron envisioned creating free markets for components within the integrated chain on the bet that the free - market terms would be better than those of the internal operations . the development of free - market benchmarks for the terms by which divisions of integrated firms do business with each other is very healthy for the economy .
- - exploiting the optionality in networks . in the old regulated environment , natural gas would be supplied to a customer through a single dedicated pipeline . enron envisioned a network by which gas could be supplied from a number of possible sources , opening the customer to the benefits of competition , and the supplier to the flexibility of alternative sourcing strategies . enron benefited from controlling switches on the network , so that they could nimbly route the molecules or electrons from the best source at any moment in time to the best use , and choose when and where to convert molecules to electrons . this policy , picked up by others in the industry , created tremendous value for both customers and suppliers .
- - rigorous risk assessment . the strategy of tailored contracts could easily have broken the firm in the absence of a clear understanding of the trading risks that the firm assumed , and of very strong internal controls . enron pioneered risk assessment and control systems that we judge to be among the best anywhere . particularly with the advent of enron online , where enron made new positions valued at over $ 4 billion each day , it became essential to have up - to - the - second information on company - wide positions , prices and ability to deliver .
the unexpected bad news from enron has little to do with trading losses by the firm , but with fears among trading partners about enron ' s ability to finance its trading activity . in a world where contracts and trading portfolios are too complex to explain in a sound bite , counterparties look to a thick equity base for assurance . it was the erosion in equity , rather than trading risk , that destroyed the firm .
- - a culture of urgency , innovation and high expectations . enron ' s corporate culture was the biggest surprise of all . the hollywood stereotype of a utility company is bureaucratic , hierarchical , formal , slow , and full of excuses . and the stodgy images of a gas pipeline company - - enron only 15 years ago - - is even duller and slower . enron became bumptious , impatient , lean , fast , innovative , and demanding . it bred speed and innovation by giving its professionals unusual freedom to start new businesses , create markets , and transfer within the firm .
success was rewarded with ample compensation and fast promotion , and an open - office design fostered brainstorming . the firm ' s organization and culture was by all accounts not a safe haven for those who believe the role of a large corporation is to fulfill entitlements for jobs . this was a lightning rod for the firm ' s detractors . and yet , it could serve as a model for more hide - bound enterprises to emulate .
enron was a prolific source of compelling new ideas about the transformation of american business . it created a ruckus in once - quiet corners of the business economy . it rewrote the rules of competition in almost every area in which it did business . it thrived on volatility .
the proposed sale of enron to dynegy risks the loss of a major r & d establishment , especially given dynegy ' s track record as a second mover following enron ' s lead . beyond what is likely to be a difficult and time - consuming antitrust review , dynegy ' s greater challenge will be to find a way to make enron ' s spirit of innovation its own . or so we all should hope , because prosperity depends on the ability of firms to reinvent themselves and remake their industries .
- - -
messrs . bodily and bruner are professors at the university of virginia ' s graduate school of business administration .
copyright ? 2000 dow jones & company , inc . all rights reserved .
j . p . morgan wins ( by not losing as much )
by susanne craig
staff reporter of the wall street journal
11 / 19 / 2001
the wall street journal
cl
( copyright ( c ) 2001 , dow jones & company , inc . )
you know things are bad on wall street when the winner of a stock - selection contest can ' t come close to breaking even .
j . p . morgan chase & co . ' s portfolio was the only one in the wall street journal ' s quarterly stock - picking survey to slide less than 10 % during the three months ended sept . 30 . the value of its stock basket fell 8 . 6 % during the third quarter .
just six of the 15 financial firms managed to beat the benchmark standard & poor ' s 500 - stock index , which dropped 14 . 7 % during the period . among the star performers that came to j . p . morgan ' s rescue : northrop grumman corp . , sbc communications inc . and procter & gamble co .
" it has turned into a real stock - picker ' s market , " says j . p . morgan equity strategist douglas cliggott . " in the first half , the market bought cyclical stocks , such as credit cards and brokers , in hopes of a recovery . we don ' t think those stocks will get interesting until sometime in 2003 . " instead , the firm ' s portfolio is weighted toward health care and consumer staples , as well as cyclical stocks such as energy and farm equipment .
the quarter was among the roughest in years for wall street investors . the terrorist attacks of sept . 11 helped contribute to the stock - market losses , which drove down the value of all portfolios in the survey , though the markets have since recovered to their pre - sept . 11 levels . the last time the group posted results this bad was during the third quarter of 1998 , during the asian financial crisis .
goldman sachs group inc . and credit suisse group ' s credit suisse first boston finished at the bottom of the pack , falling 23 . 2 % and 30 . 1 % respectively . the performance of last - place finisher csfb was dragged down by losses at companies such as veritas software corp . ( down 72 . 3 % in the quarter ) , praecis pharmaceuticals inc . ( down 64 . 8 % ) and software provider amdocs ltd . ( down 51 % ) .
for csfb , " it was not a good stock - picking quarter , that ' s for sure , " says al jackson , the firm ' s global head of equity research . " it was our tech and telecom . . . and the events of sept . 11 that hurt us . "
credit suisse first boston recently changed the approach to its model portfolio , opting against sector weightings , mr . jackson says . this strategy has hurt csfb in recent quarters , because of the steep slump in areas such as technology and telecom . the firm recently added a number of old economy stocks to its portfolio , such as citigroup inc . , dow chemical co . and gannett co . says mr . jackson : " we are going back to our roots and asking what our best ideas are . "
like csfb , goldman was hit by a drop in the share price of technology companies , such as check point software technologies ltd . ( down 56 . 5 % in the quarter ) . its portfolio was also dragged down by shares of embattled enron corp . ( down 44 . 3 % ) . morgan stanley and royal bank of canada ' s rbc dain rauscher , which placed 6 th and 12 th respectively , also have the energy company on their lists .
in addition to enron , stocks hard it by the terrorist attacks , such as lodging giant starwood hotels & resorts worldwide inc . , walt disney co . and airlines such as skywest inc . , also hurt the portfolio performance of many securities firms .
it is unlikely people will buy any company ' s entire recommended list at one time . the journal survey is intended to give investors an idea of how their portfolio would look if they let the professionals do all the picking . calculations in the quarterly survey , done for the journal by zacks investment research in chicago , take into account capital gains or losses , dividends and theoretical commissions of 1 % on each trade .
overall , edward d . jones & co . , of st . louis , emerged with the most consistent results across the board , placing second in the quarter and for the year . its 85 % return over five years is the best of the group and ahead of the total return for the s & p 500 of 62 . 7 % . perhaps more than any other firm , edwards jones takes a buy - and - hold approach to investing , making very few changes to its portfolio from quarter to quarter , or even year to year .
" it ' s the old story of the tortoise and the hare , and we believe slow and steady wins the race , " says david otto , edward jones director of research . " we are really , really proud of the five - year number . we believe in getting rich , slowly . "
on a quarterly basis , the portfolio of prudential securities inc . , a unit of prudential financial , came in second only to j . p . morgan , falling 11 . 8 % . however , investors sitting with the stocks prudential recommends haven ' t done as well in the long run . the value of its basket of stocks has fallen 45 . 9 % in the past year , finishing ahead of only lehman brothers holdings inc . , which posted a one - year loss of 54 . 9 % .
seven firms managed to beat the s & p 500 index during the past 12 months , which fell 26 . 6 % in the period .
lehman , which finished last in the survey in the second quarter thanks to its heavy weighting in technology , managed to move up in the rankings this quarter . this primarily stemmed from its annual shuffle of the 10 stocks in its portfolio , known as its " ten uncommon values . " this time around , the firm ' s portfolio slipped 18 . 4 % in the quarter , for an 11 th place finish . just one of its 10 stocks , washington mutual inc . , managed to eke out a positive return , of 3 . 1 % . its biggest quarterly loser : energy company mirant corp . , which fell 36 . 3 % in the period .
" it ' s a portfolio that has done decently since the market troughed , " says jeff applegate , lehman ' s chief market strategist . he says he believes the market hit bottom sept . 21 .
- - - brokerage houses ' stock - picking prowess
estimated performance of stocks on the recommended lists of 15 major
brokerage houses through sept . 30 . figures include price changes ,
dividends , and hypothetical trading commissions of 1 % .
- - - - best & worst picks - - - - - - - - - returns - - - - - -
biggest biggest latest one - five -
gain loss qtr . year year
raymond james
caci intl . + 49 . 7 % skywest - 51 . 1 % - 14 . 2 % - 14 . 7 % + 56 . 8 %
edward jones
amr water wk + 20 . 5 celestica - 47 . 1 - 11 . 2 - 18 . 7 + 85 . 1
merrill lynch
triad + 20 . 1 amer . - 34 . 5 - 15 . 4 - 19 . 8 + 64 . 9
hospitals express
ubs warburg
pepsico + 9 . 7 bea systems - 69 . 2 - 12 . 9 - 19 . 9 n . a .
j . p . morgan sec .
northrop + 26 . 6 macrovision - 58 . 5 - 8 . 6 - 20 . 0 n . a .
bear stearns
mbna + 19 . 2 embraer - 60 . 3 - 15 . 9 - 22 . 2 + 50 . 9
salomon s . b .
abbott labs + 8 . 5 hewlett - - 43 . 6 - 16 . 0 - 25 . 0 + 17 . 9
packard
morgan stanley dw
johnson & john + 11 . 2 emc - 59 . 8 - 14 . 2 - 29 . 0 + 33 . 7
dain rauscher
el paso energy + 17 . 4 i 2 - 82 . 6 - 19 . 6 - 32 . 2 n . a .
technologies
a . g . edwards
verizon + 4 . 4 emc - 59 . 8 - 17 . 4 - 33 . 4 + 34 . 8
u . s . bancorp piper jaf .
eli lilly + 9 . 4 emc - 59 . 8 - 22 . 0 - 39 . 9 + 36 . 7
goldman sachs
wal - mart + 8 . 3 check pt - 56 . 5 - 23 . 2 - 40 . 6 + 60 . 0
sftwr
credit suisse fb
johnson & john + 11 . 2 veritas - 72 . 3 - 30 . 1 - 44 . 9 + 38 . 1
prudential sec .
kraft foods + 12 . 9 bmc - 41 . 6 - 11 . 8 - 45 . 9 + 41 . 3
software
lehman bros .
wash . mutual + 3 . 1 mirant - 36 . 3 - 18 . 4 - 54 . 9 + 29 . 6
s holding period may be less than full quarter
n . a . = not available
source : zacks investment research
copyright ? 2000 dow jones section c
german bank is in talks with enron to buy a unit
by suzanne kapner
11 / 19 / 2001
the new york times
page 2 , column 6
c . 2001 new york times company
london , nov . 18 - - a large german bank is in talks to buy wessex water from the enron corporation , people close to the discussions said today .
enron is looking to sell wessex water , of britain , as well as other noncore assets in india and brazil , after a financial crisis nearly brought its main energy trading business to a halt . that crisis led to enron ' s decision earlier this month to be acquired by dynegy inc . , a much smaller rival .
the german bank , westdeutsche landesbank girozentrale of dusseldorf , or westlb , is among several suitors for wessex water , people close to the discussions said . the sale has also attracted the attention of industry rivals like thames water , owned by rwe of germany . but such a combination would most likely incur a long review by regulators , who might either block the merger on antitrust grounds , or exact stiff concessions , industry experts said .
wessex water is likely to be sold for more than $ : 1 billion ( $ 1 . 4 billion ) but less than the $ : 1 . 4 billion that enron paid for it in 1998 , analysts said .
' ' in hindsight , we made some very bad investments in noncore businesses , ' ' kenneth l . lay , enron ' s chairman and chief executive , told analysts in a conference call last week . those investments ' ' have performed far worse than we ever could have imagined , ' ' he said , citing the azurix water business , of which wessex water is a part , and energy assets in brazil and india .
executives from enron were not immediately available for comment today . westlb executives declined to comment .
westlb has been aggressively pursuing acquisitions in britain , bidding for british telecommunications ' phone network and the nation ' s railway tracks controlled by the troubled railtrack , which is restructuring under government supervision . neither of those bids has progressed beyond the initial stages .
last summer , westlb helped finance the management buyout of the mid kent water company through swan capital , its private equity vehicle .
copyright ? 2000 dow jones & company , inc . all rights reserved .
credit markets
bond boom isn ' t likely to lift economy as corporations swap old debt for new
by jathon sapsford
staff reporter of the wall street journal
11 / 19 / 2001
the wall street journal
cl
( copyright ( c ) 2001 , dow jones & company , inc . )
when at & t last week completed the second - biggest bond sale in history - - capping one of the busiest bond periods in years - - it came as welcome news amid fears of a credit crunch . here was new money , meaning new spending on plants , equipment and jobs that could help pull the economy out of its slump .
that $ 10 . 9 billion at & t deal , and a slew of similar bond deals from big companies ranging from boeing and anheuser - busch to kraft foods and general motors , may not provide as big of a boost as economists are banking on . that is because corporations , like homeowners , are in the midst of a refinancing boom .
corporations are hitting the market not just because rates are cheap , but because they often can ' t get money in other crucial markets . in particular , they are sidestepping the commercial paper market - - short - term corporate ious used to finance day - to - day operations , where rates traditionally are lowest - - because investors are unwilling to finance many well - known corporations .
the result has been a huge jump in bond sales , the majority of which are used to reduce existing debt . since the sept . 11 terrorist attacks , about $ 135 billion in investment - grade bonds have been sold , up from about $ 78 billion in the year - earlier period . overall issuance this year is likely to set a record , clearing $ 600 billion , compared with $ 411 billion in 2000 .
" the driving force behind this surge in bond issuance is refinancing short - term commercial paper to long - term debt , " says john lonski , chief economist at moody ' s investors service , a credit - rating agency .
usually , rising bond issuance presages economic growth . in 1991 , corporations sold a record number of bonds to exploit falling interest rates . but then , companies poured much of the money they raised back into their operations , a flurry of investment that foreshadowed the economic boom of the late 1990 s .
this time around , the surge in bond deals won ' t pump in enough new money to the economy to make a dramatic difference . though , as in the case of the millions of homeowners who are refinancing their mortgages to lower monthly payments , it could help ease some pressure on stretched corporate - balance sheets and help to fund some of the companies ' day - to - day operations .
not all of the money being raised is to refinance short - term debt , of course , and the string of bond deals shows that many of the nation ' s biggest borrowers have ready access to funding if they need it .
but most companies are similar to at & t , which last week provided the biggest refinancing example yet .
over the next three months , the telecom company was facing $ 6 . 5 billion in expiring commercial paper . under normal conditions , corporations pay off maturing commercial paper by " rolling over " that debt , or issuing new commercial paper to replace the old . but rolling over commercial paper became much harder for at & t after moody ' s cut the company ' s short - term and long - term credit ratings . through the bond deal , at & t raised money at relatively attractive rates while avoiding the difficulties of the commercial - paper market .
other companies facing downgrades also are scrambling to find alternatives to the commercial - paper market through bonds , loans or revolving credit lines . " the ripple effects of this are being felt throughout the capital markets , " says meredith coffey , senior vice president at loan pricing corp . , a debt - market - analysis company .
for the most extreme cases , the bond markets don ' t offer refuge . enron , hammered by a third - quarter loss of $ 618 million that led to a string of downgrades , drew down $ 3 . 3 billion from its emergency bank credit line to repay investors in its commercial paper . it then turned to its banks for an additional $ 1 billion loan to pay off more commercial - paper investors , thus tiding it over until it could merge with rival dynegy .
most investment - grade companies aren ' t nearly so bad off , and thus have ready access to bond investors . general motors , for instance , had little trouble selling $ 6 billion in debt last month , while ford motor easily sold bonds totalling $ 9 . 4 billion .
but the surge in bond sales masks signs that even investment - grade companies are having trouble convincing investors that they are good for their money .
take ford . standard & poor ' s and moody ' s downgraded ford ' s debt ratings last month to triple - b - plus and single - a - 3 , respectively . with that rating , ford is far enough down the spectrum of investment - grade debt that many of the ultraconservative investors in commercial paper won ' t touch it , meaning that it had to turn to corporate bonds to refinance its debt . ford concedes that a big reason it is selling bonds was to avoid the trouble in the commercial - paper market .
boyce greer , the money - market group leader at fidelity investments , says he often stops buying the commercial paper of a corporation at the first sign of eroding profitability - - even before they get downgraded . " you can ' t wait around for a rating agency [ to downgrade a company ] , " he says .
moody ' s has downgraded five times as many corporations as it has raised so far this year . thus , the market for corporate commercial paper has shrunk to $ 1 . 4 trillion at the end of october , down from $ 1 . 6 trillion at the end of last year .
- - -
friday ' s credit markets
last week was a brutal time to own treasurys . the market sold off so sharply as to push yields , which move inversely to prices , almost back up to where they stood before the terrorist attacks . it was the worst bond selloff since 1987 , according to economists at banc one capital markets .
losses were heaviest in issues like the two - year note , the most sensitive to expectations about federal reserve policy . since hitting a record low of 2 . 30 % on nov . 7 , the two - year yield has risen 0 . 80 percentage point to 3 . 05 % . in the same period , the 30 - year bond yield has risen 0 . 50 percentage point to 5 . 27 % .
at 4 p . m . friday , the benchmark 10 - year treasury note was down 1 3 / 32 points from late thursday , or $ 10 . 94 per $ 1 , 000 face value , at 100 25 / 32 . its yield jumped to 4 . 897 % from 4 . 756 % thursday .
the 30 - year treasury bond ' s price fell 1 19 / 32 to 100 25 / 32 to yield 5 . 317 , up from 5 . 211 % thursday .
why the selloff ? people in the market cite a shift toward the view that the u . s . economy may finally be on the brink of recovery . that means the fed may not need to employ many more rate cuts to get growth back on track .
- - michael s . derby and steven vames
copyright ? 2000 dow jones financial desk
preview / week of nov . 19 - 25 investors looking for answers in enron filing
bloomberg news
11 / 19 / 2001
los angeles times
home edition
c - 2
copyright 2001 / the times mirror company
enron corp . investors hope the energy trader ' s third - quarter report to the securities and exchange commission will answer some of the questions that sent its shares tumbling and led to a proposed sale to rival dynegy inc .
enron , which has been criticized for failing to clearly explain how it makes money , may disclose in a filing expected today more on how much is owed by the company and affiliated partnerships , as well as any planned job cuts and other cost - saving moves related to dynegy ' s $ 24 - billion buyout .
enron agreed to sell after its stock plunged 67 % in three weeks amid an sec investigation into partnerships run by enron executives . investors worry that new disclosures , such as previously unreported debt , might threaten enron ' s credit rating and scuttle the merger , possibly pushing enron into bankruptcy .
enron chairman kenneth lay acknowledged last week that failed investments and a loss of investor confidence forced the sale to dynegy , and he and other executives pledged to be more open with investors .
enron shares fell 48 cents friday to close at $ 9 on the new york stock exchange . dynegy fell $ 1 . 53 to $ 42 . 47 .
enron ' s third - quarter earnings report , which had been expected last week , was delayed by the dynegy talks and a restatement of earnings , chief financial officer jeffrey mcmahon said .
enron reduced net income for four years by a combined $ 586 million to include losses from affiliated partnerships .
today ' s filing , called a 10 - q , will include a balance sheet summarizing assets and debts . enron for years has omitted balance sheets , which the sec requires as part of the 10 - q , from its press releases announcing earnings .
copyright ? 2000 dow jones & company , inc . all rights reserved .
companies & finance international - dynegy bid faces long wait .
by nancy dunne and andrew hill .
11 / 19 / 2001
financial times
( c ) 2001 financial times limited . all rights reserved
dynegy ' s $ 9 . 8 bn rescue bid for enron , the larger rival energy group , poses complex and unprecedented regulatory challenges for the federal energy regulatory commission ( ferc ) , which is likely to lead the review of the bid .
officials from the two houston - based companies , which announced the deal 10 days ago , estimated the regulatory process would take six to nine months to complete .
but the ferc review could take longer , according to experts , and approval of the deal is further complicated by such issues as the parallel securities and exchange commission investigation into enron ' s finances .
" it ' s very complicated . it will be very time - consuming , " said one person close to the ferc commissioners . as of friday , the groups had not yet filed for ferc approval .
" ( the deal ) raises issues that have never been considered before by ferc , " said edward comer , general counsel to the edison electric institute , the association of us electric utilities .
" it has never considered the merger of two huge marketers , and in the past , marketing wasn ' t considered as significant a portion of the energy sector as it has become . "
a typical deal now takes about 200 days to win ferc approval . but mr comer said approval of the dynegy bid could take anywhere from six months to two years .
the agency ' s guidelines prohibit mergers if they give the new company the market power to push prices above competitive levels for " a significant period of time " .
it analyses market power by identifying the products sold , the customers and suppliers affected and market concentration .
" mergers in the past have been considered on the basis of assets , " said patti harper - slaboszewicz of frost & sullivan , a market research and consulting firm . " the rules were written when the industry was vertically integrated . "
now the question is how ownership of energy trading services will be calculated . it could be difficult to assess if the companies are exerting market power because information on the trading books of companies such as enron and dynegy is closely guarded , she said .
the two companies must also win consent from either the justice department or the federal trade commission , and from states where the companies have pipelines and provide retail services .
( c ) copyright financial times ltd . all rights reserved .
http : / / www . ft . com .
copyright ? 2000 dow jones & company , inc . all rights reserved .
fund track
russia fund surges amid global woes
by victoria marcinkowski
dow jones newswires
11 / 19 / 2001
the wall street journal
cl 7
( copyright ( c ) 2001 , dow jones & company , inc . )
everything is relative in the investing world , so with u . s . investors nervous about homeland stocks , european and asian markets sagging and terrorism worries abounding , russia ' s risky markets seem less so these days .
so far this year , pilgrim russia fund , which was bought by ing groep nv late last year , has been the top - performing regional mutual fund , gaining 53 % , according to fund tracker morningstar inc . by comparison , the standard & poor ' s 500 - stock index has slumped nearly 14 % .
of course , the risks in russia remain . despite recent economic gains , the country still is struggling with a weak banking system , inadequate state institutions to enforce contract laws and few businesses run by the " modern " rules of corporate governance , according to samuel oubadia the 37 - year - old manager of the russia fund .
" but they are getting more open , " mr . oubadia said , though russia ' s lax financial reporting standards are still one of the main roadblocks for foreign investors . with $ 49 million in assets , the pilgrim russia fund invests between 90 % and 95 % in russian stock , with the balance held in cash .
" while the global economy is slowing , russia is still in an expansion mode , " mr . oubadia said . after years of economic reforms , consumer spending is up 10 % and the former soviet union ' s gross domestic product is expected to grow 3 % to 5 % next year , more than twice as much as that of the u . s . and europe .
two - thirds of the fund ' s stocks are oil and gas companies , which are still the most liquid stocks in russia . utilities , mining , telecommunications companies and breweries make up the rest . " there ' s no escaping oil and gas if you want to manage a russia fund , " mr . oubadia said .
the spike in oil prices earlier this year made the investment in oil worthwhile , propelling earnings growth for russia ' s oil and gas companies . higher oil prices also worked wonders for the russian economy , which is largely dependent on oil and gas . more recently , however , falling oil prices have threatened the companies ' profit growth .
but the fund manager , who is based in the hague , said he doesn ' t think people should invest in russian oil stocks because of their earnings prospects . " you don ' t invest because of earnings growth - - there will be none for russian oil companies this year . you invest because of the stocks ' low valuation , " mr . oubadia said , adding that most of the russian oil companies still trade well below the world - wide average for the sector .
yukos oil is one of the fund ' s largest investments , making up about 12 % of the fund ' s holdings . surgutneftegaz and lukoil holdings also make up more than 5 % each of pilgrim russia ' s assets . while mr . oubadia said the companies should be able to handle falling oil prices , partly by cutting production , he worries that further price erosion could hamper a fragile russian stock market that relies so heavily on oil and gas stocks .
" can russian markets do well with lower prices for oil ? " he asked . " the short answer is yes . but how low will prices drop ? " mr . oubadia acknowledged that weak oil prices might cause him to shift some investments from oil and gas into other russian sectors , including telecom stocks and consumer products .
the russia fund isn ' t for the timid . in 1998 , when the russian economy collapsed , the fund - - then called lexington troika dialog russia , lost 83 % of its value . a year later , the fund soared 160 % . in 2000 the fund finished down almost 18 % .
- - -
janus stock shuffle : janus capital corp . bulked up on lower - priced value stocks and shed some shares of its long - held technology companies during the third quarter , a new securities and exchange commission filing showed .
the denver fund firm reported that during the third quarter , it lowered its investments in 14 of the 20 largest holdings it had owned as of june 30 . the largest reduction was a 43 . 6 million - share sale of nokia corp . stock . after the sale , janus still owned a large 183 . 2 million - share position in the wireless - phone company at the end of the third quarter .
during the quarter , janus also sold more than half of its stakes in tech companies emc corp . and sun microsystems inc . in addition , the fund company , a unit of stilwell financial inc . , trimmed its exposure to energy company enron corp . , selling 1 . 5 million shares to reduce its overall position to 41 . 4 million shares at the end of september .
on the buying side , janus , one of the hottest fund firms of the late 1990 s thanks to bets on leading technology stocks , about doubled its position in software company microsoft corp . it also boosted its holding in the investment company run by warren buffett , berkshire hathaway inc . , while starting a small position in philip morris cos . , whose dividend - rich stock is usually more popular with price - sensitive " value " managers . janus has introduced new value portfolios recently , but most of its investors ' assets still follow faster - growing companies .
- - aaron lucchetti and todd goren
copyright ? 2000 dow jones source : world reporter ( tm )
the sunday telegraph
the german state - owned bank , westlb , is in talks to buy wessex water from its troubled us parent enron .
westlb is thought to be one of a number of financial buyers to have approached enron with a view to acquiring wessex , which is valued at more than agbplbn ( el . 63 bn ) .
enron , the energy trading group which bought wessex in 1998 for agbpl . 4 bn , is being bought by its much smaller us rival dynegy after collapsing into financial crisis .
the independent on sunday
the water and sewage company wessex water is understood to be up for sale following an offer to take over its owner , enron .
three years ago , enron spent agbpl . 4 bn on wessex water .
but dynegy is understood to want to concentrate on us and european energy assets and is not interested in non - core assets .
any hope to regain the same amount of money could be derailed as the industry is put off by regulatory problems , and the company ' s results have worsened due to imposed price cuts over the past year .
copyright ? 2000 dow jones & company , inc . all rights reserved .
india bses : dabhol pwr proj due diligence done jan - report
11 / 19 / 2001
emerging markets report
( copyright ( c ) 2001 , dow jones dow jones newswires ; 91 - 11 - 461 - 9426 ; himendra . kumar @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
india dabhol pwr : no termination notice until crt verdict
11 / 19 / 2001
dow jones international news
( copyright ( c ) 2001 , dow jones dow jones newswires ; 91 - 11 - 461 - 9426 ; himendra . kumar @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
financial post : news
fears raised on enron deal : $ 15 . 6 - billion rescue bid
andrew hill and sheila mcnulty
financial times
11 / 19 / 2001
national post
national
fp 3
( c ) national post 2001 . all rights reserved .
new york - companies that trade with enron corp . , the houston , texas - based energy group , are taking precautions in case dynegy inc . , also of houston , withdraws its $ 15 . 6 - billion rescue bid for its rival , a decision that could trigger a crisis in the energy trading market .
counter - parties to enron , which is one of the principal market - makers providing liquidity in the energy market , are seeking to limit their exposure to the group , in spite of reassurances from both enron and dynegy that the takeover will go through .
experts also say the implications of the deal are so complex that the regulatory review could take much longer than the six to nine months company officials have estimated .
analysts say the 27 % spread between the value of dynegy ' s offer price and enron ' s share price suggests a 65 % to 75 % chance the bid will succeed . but bankers and energy executives are still worried about systemic risk , both in the energy market and in financial markets , where companies such as enron use derivatives to offset the risk of energy price fluctuations .
enron was close to meltdown until dynegy stepped in with a rescue bid 10 days ago , having persuaded credit rating agencies not to downgrade enron ' s debt to below investment grade .
clauses built into the merger agreement signed with enron give dynegy the right to walk away under certain circumstances , although the two companies ' officials and advisors differ on how easy it would be for dynegy to pull out .
while the situation remains uncertain , companies that deal with enron are reluctant to lock themselves into long - term contracts to buy or sell power , said john olson , an analyst at sanders morris harris , the investment banking arm of houston , texas - based sanders morris harris group .
keith stamm , chief executive of aquila inc . , the energy marketing and risk - management company , said his company had begun preparing contingency plans in case the deal fell through .
copyright ? 2000 dow jones now a sale has become even more urgent . reportedly , tatas and bses are interested ; so are the lending institutions . clearly , if a settlement is to be reached , this is the optimum time .
but one is not very optimistic . for one , delhi and mumbai will be involved , and bureaucracies never understand opportunity costs . our byzantine decision - making processes make timely decisions impossible . further , if a deal does take place , there will be the inevitable allegations of corruption . it is much safer for the reputation of the concerned ministers in mumbai and delhi to allow the drift to continue , to " let the law take its own course " , whatever the costs ! sadly , as jairam ramesh said in this paper , indian politicians respond to developments only out of compulsion , not conviction .
copyright ? 2000 dow jones & company , inc . all rights reserved .
enron mentions - 11 / 19 / 01
headed for a fall ; companies issued special zero - coupon bonds , assuming they ' d never have to pay them off . now shareholders could be on the hook for a $ 65 billion tab .
fortune magazine , 11 / 26 / 01
manager ' s journal : what enron did right
the wall street journal , 11 / 19 / 01
j . p . morgan wins ( by not losing as much )
the wall street journal , 11 / 19 / 01
german bank is in talks with enron to buy a unit
the new york times , 11 / 19 / 01
bond boom isn ' t likely to lift economy as corporations swap old debt for new
the wall street journal , 11 / 19 / 01
preview / week of nov . 19 - 25 investors looking for answers in enron filing
los angeles times , 11 / 19 / 01
companies companies issued special zero - coupon bonds , assuming they ' d never have to pay them off . now shareholders could be on the hook for a $ 65 billion tab .
janice revell
11 / 26 / 2001
fortune magazine
time inc .
131
( copyright 2001 )
it was an irresistible proposition : borrow billions of dollars , pay no interest , reap millions in tax breaks , and then wait for the debt to simply disappear . that was the promise of zero - coupon convertible bonds , and companies from enron to merrill lynch binged on what seemed like free money .
but , of course , there was a catch : for this scenario to play out , a company ' s stock price had to rise sharply - - and quickly . that ' s because investors bought the bonds in the hope of converting them into equity - - if the stock tanked , the bonds would no longer be worth converting . so to make them more attractive to buyers , companies had to build in an escape hatch : if the stock price failed to rise sufficiently , investors could " put " ( that is , sell ) the bonds back to the company - - in many cases , after just one year .
and that ' s exactly what ' s about to happen - - to the tune of some $ 65 billion over the next three years . stock prices have fallen so far that for at least half of these special hybrids , the prospect of conversion is now absurd . it simply won ' t happen . so bondholders are looking to get their money back the first chance they can . and because of the put feature , that is possible . suddenly companies like tyco , comcast , and dozens more are on the hook for billions of dollars in debt and interest they thought they ' d never have to pay .
that could be very bad news for shareholders of these companies . after all , they ' re the ones who are going to be picking up the tab when all that debt comes due . huge chunks of cash will disappear from balance sheets to repay bondholders . companies without enough cash - - and the majority fall into this camp - - are likely to face skyrocketing interest charges when they borrow money anew . that means sharply reduced earnings . especially at risk are investors in companies with poor credit ratings - - prime candidates for killer refinancing costs . some companies may even be forced to issue stock to pay off the debt , creating significant shareholder dilution , especially at current depressed prices . to make matters worse , this is happening at a time when the economy is barreling downhill and corporate profits are already shrinking . " this is a ticking time bomb , " warns margaret patel , manager of the pioneer high yield bond fund , a top - performing junk fund .
the seeds of this mess were sown in mid - 2000 , when the stock market started to falter . companies in search of capital balked at the thought of selling stock while their share prices were struggling . zero - coupon convertible bonds presented an attractive alternative because companies didn ' t have to make cash interest payments on the bonds ( hence the name " zero " ) . instead issuers offered an up - front discount - - for instance , investors would buy a bond for $ 700 and collect $ 1 , 000 when it matured .
companies also gave investors the right to convert the bonds into a fixed number of common shares . but the bonds were structured so that conversion would make sense only if the stock price rose significantly - - in many cases , by more than 50 % . with that protective feature ( called the conversion premium ) , zeros took off . corporate issuers would pay no interest , and once their stock prices had climbed back to acceptable levels , the debt would be swept away into equity . " if the bonds are converted , it ' s a home run for everybody , " says jonathan cohen , vice president of convertible - bond analysis at deutsche bank .
that four - bagger , of course , depends entirely on the stock price rising . if it doesn ' t , the bondholders , armed with that handy put feature , can simply sell the bonds back to the company . great for bondholders , but not so hot for the company or its shareholders . but , hey , what are the odds of that happening ? " cfos and ceos believe that their stock will just continue to go up , " says cohen . " they don ' t worry about the bond getting put . "
if all this seems a little complicated , that ' s because it is . a real - life example should help . california - based electric utility calpine issued $ 1 billion in zeros in april to refinance existing debt . at the time , the company ' s stock was trading at about $ 55 a share - - severely undervalued in the opinion of company management . " we really didn ' t want to sell equity at that point , " says bob kelly , calpine ' s senior vice president of finance . so the company instead opted to sell zeros , setting the conversion premium at a hefty 37 % .
still , with no cash interest payments and a stock price that had to rise significantly to make conversion worthwhile , the bonds weren ' t exactly a screaming buy for investors . so calpine added the put feature : investors could sell the bonds back to the company after one year at the full purchase price , eliminating any downside risk .
things haven ' t exactly worked out as management had hoped . the stock has since plummeted to $ 25 , and it now has to triple before conversion makes sense . so it ' s looking as though calpine will be liable for the $ 1 billion in borrowed money when investors get the chance to put the bonds this april . there ' s also the refinancing cost . according to kelly , calpine ' s borrowing rate could run in the neighborhood of 8 . 5 % - - an extra $ 85 million per year in cash . " obviously , nobody plans for their stock to go down , " kelly says . " i don ' t think there was one person around who thought the bond would be put . "
calpine ' s potential costs are particularly high because its credit rating is straddling junk . " if you are a borderline investment - grade company , a financing of this nature is not necessarily the most appropriate thing in the world , " notes anand iyer , head of global convertible research at morgan stanley . the problem is , there are a slew of companies with far worse credit ratings out there : jeff seidel , credit suisse first boston ' s head of convertible - bond research , estimates that about half of all zeros outstanding fall into the junk category . and others are at risk of having their ratings downgraded before the put date . today , with junk yielding as much as 5 1 / 2 percentage points above bonds rated investment grade , refinancing can be a pricey proposition .
contract manufacturer solectron is one that could well get hit by the high price of junk . it has $ 845 million in zeros that it will probably have to buy back this january , and another $ 4 . 2 billion coming down the pike over the next couple of years . because of slower - than - expected sales , the company was recently put on negative credit watch by three rating agencies . and if solectron ' s credit is downgraded , the zeros would slide into junk status , a situation that could cost the company - - and its shareholders - - tens of millions of dollars in refinancing charges .
refinancing isn ' t the only worrisome cost associated with these zeros . companies pay hefty investment banking fees to sell their bonds - - up to 3 % of the amount raised . if the debt is sold back , many will have spent millions for what essentially amounted to a one - year loan . " they ' re getting bad advice , " claims one banker who didn ' t want to be named . " look at the fee the banker earned and look at the kind of financing risk the company got into . "
as if those potential consequences were not scary enough , shareholders can also get whacked when the bonds are first issued . that ' s because some 40 % are bought by hedge funds , which short the company ' s stock ( sell borrowed shares with the intention of buying them back at a lower price ) at the same time that they buy the bonds . if the stock goes down , the shorts make money from their position . if it goes up , they profit by converting the bond to stock . this hedging strategy almost always causes the stock to plummet , at least for a while . grocery chain supervalu , for example , recently lost 10 % of its market cap the day it announced it was issuing $ 185 million in zeros .
despite all the pitfalls , the love affair with such pollyanna bonds continues , thanks in large part to the slick tax and accounting loopholes they provide . in fact , the hit on earnings per share can be the lowest of any form of financing . even better , thanks to a wrinkle in the tax code , companies can rake in huge tax savings by deducting far more interest than they ' re actually paying . all they have to do is agree to pay small amounts of interest if certain conditions prevail . verizon communications , for instance , would pay 0 . 25 % annual interest on its $ 3 billion in zero bonds if its stock price falls below 60 % of the issue ' s conversion price . in the eyes of the irs , oddly , that clause enables the company to take a yearly interest deduction , for tax purposes , of 7 . 5 % - - the same rate it pays on its regular debt . ( why ? trust us , you don ' t want to know . ) that adds up to an annual deduction of more than $ 200 million , even if verizon never shells out a dime in interest . not surprisingly , more than half of the zeros issued in 2001 contain similar clauses . " it ' s an incredible deal for them , " says vadim iosilevich , who runs a hedge fund at alexandra investment management . " not only are they raising cheap money , they ' re also doing tax arbitrage . "
so despite the enormous risks to shareholders , companies continue to issue zeros at a steady clip : according to convertbond . com , seven new issues , totaling $ 3 . 5 billion , have been sold since oct . 1 alone . " i think the power of the tax advantage is going to keep them around , " says csfb ' s seidel . call it greed or just blind optimism that the markets will recover quickly - - it doesn ' t really matter . either way , it ' s the shareholders who ' ll be left paying the bill .
feedback : jrevell @ fortunemail . com
the bill comes due
companies issued convertible zeros , with put features , when the stock market soured . now repayment looms .
1999 2000 2001 2002 2003 2004
amount issued , $ 5 . 2 $ 19 . 6 $ 37 . 5 in billions
amount puttable , $ 2 . 4 $ 2 . 6 $ 4 . 8 $ 22 . 0 $ 19 . 1 $ 24 . 0 in billions
source : convertbond . com
when zero is a negative number
the danger posed by convertible zero bonds depends on a number of factors , according to morgan stanley ' s convertbond . com : the size of the bond , the put date , the company ' s credit rating and cash on hand , and how far the stock must rise for the bond to convert to equity .
[ a ] date of put [ b ] amount owed ( millions ) [ c ] cash on hand [ 2 ] ( millions ) [ d ] stock price as of 11 / 09 / 01 [ e ] % below conversion price
company bond rating [ 1 ] our risk assessment [ a ] [ b ] [ c ] [ d ] [ e ] tyco 11 / 17 / 01 $ 3 , 500 $ 2 , 600 $ 54 . 00 49 % investment grade not a problem - - for now . the conglomerate has cash to pay for bonds put this november . another $ 2 . 3 billion is puttable in 2003 .
solectron 1 / 27 / 02 $ 845 $ 2 , 800 $ 13 . 25 155 % investment grade in the danger zone . may be downgraded to junk if results don ' t improve . has additional $ 4 . 2 billion at risk in 2003 and 2004 .
calpine 4 / 30 / 02 $ 1 , 000 $ 1 , 242 $ 25 . 50 180 % inv . grade / junk possibly a pricey tab . on the border between investment grade and junk , the energy company faces high refinancing charges .
pride international 1 / 16 / 03 $ 276 $ 176 $ 12 . 50 148 % junk may need to drill for cash . the oil services company already has a heavy debt load in addition to its zeros .
western digital 2 / 18 / 03 $ 126 $ 201 $ 4 . 25 547 % junk hard drive ahead . the tech outfit has already paid down some of its zeros by issuing stock . more dilution possible .
brightpoint 3 / 11 / 03 $ 138 $ 67 $ 3 . 25 609 % junk watch out . this mobile - phone distributor plans to repurchase the bonds and is likely to incur high refinancing charges .
aspect commun . 8 / 10 / 03 $ 202 $ 134 $ 2 . 00 1 , 016 % junk the credit rating of this unprofitable call center company is near the lowest grade of junk . high alert !
enron [ 3 ] 2 / 7 / 04 $ 1 , 331 $ 1 , 000 $ 8 . 50 1 , 413 % investment grade very risky . among enron ' s myriad woes , its debt is on the verge of being downgraded yet again . it ' s already behaving like junk .
verizon 5 / 15 / 04 $ 3 , 270 $ 3 , 000 $ 50 . 00 70 % investment grade verizon faces little risk because of its strong credit rating and the long lead time on its put dates .
merrill lynch 5 / 23 / 04 $ 2 , 541 $ 20 , 000 $ 49 . 00 124 % investment grade also not yet a problem . this underwriting leader made sure its own zeros could not be put for three years .
[ 1 ] based on ratings from moody ' s and standard calpine had a split rating at press time . [ 2 ] as of most recently reported financial results . [ 3 ] now expected to merge with dynegy .
quote : contract manufacturer solectron is one zero - bond issuer that could well get hit hard . stocks have fallen so far that for at least half of all bonds out there , the prospect of conversion is absurd .
b / w illustration : illustration by david suter
copyright ? 2000 dow jones & company , inc . all rights reserved .
manager ' s journal : what enron did right
by samuel bodily and robert bruner
11 / 19 / 2001
the wall street journal
a 20
( copyright ( c ) 2001 , dow jones & company , inc . )
this is a rough era for american business icons . subject to the vagaries of age ( jack welch ) , product failure ( ford / firestone tires ) , competition ( lucent , at & t ) , technology ( hewlett - packard and compaq ) , and dot - bomb bubbles ( cmgi ) , managers and their firms remind us that being an icon is risky business . the latest example is enron , whose fall from grace has resulted in a proposed fire sale to dynegy .
once considered one of the country ' s most innovative companies , enron became a pariah due to lack of transparency about its deals and the odor of conflicts of interest . the journalistic accounts of enron ' s struggles drip with schadenfreude , hinting that its innovations and achievements were all a mirage .
we hold no brief regarding the legal or ethical issues under investigation . we agree that more transparency about potential conflicts of interest is needed . high profitability does not justify breaking the law or ethical norms . but no matter how the current issues resolve themselves or what fresh revelations emerge , enron has created an enormous legacy of good ideas that have enduring value .
- - deregulation and market competition . enron envisioned gas and electric power industries in the u . s . where prices are set in an open market of bidding by customers , and where suppliers can freely choose to enter or exit . enron was the leader in pioneering this business .
market competition in energy is now the dominant model in the u . s . , and is spreading to europe , latin america , and asia . the winners have been consumers , who have paid lower prices , and investors , who have seen competition force the power suppliers to become much more efficient . the contrary experience of california , the poster child of those who would re - regulate the power industry , is an example of not enough deregulation .
- - innovation and the " de - integration " of power contracts . under the old regulated model of delivering gas and electricity , customers were offered a one - size - fits - all contract . for many customers , this system was inflexible and inefficient , like telling a small gardener that you can only buy manure by the truckload . enron pioneered contracts that could be tailored to the exact needs of the customer .
to do this , enron unbundled the classic power contract into its constituent parts , starting with price and volume , location , time , etc . , and offered customers choices on each one . again , consumers won . enron ' s investors did too , because enron earned the surplus typically reaped by inventors . arguably , enron is the embodiment of what economist joseph schumpeter called the " process of creative destruction . " but creative destroyers are not necessarily likable , pleasant folks , which may be part of enron ' s problem today .
- - minimization of transaction costs and frictions . enron extended the logic of de - integration to other industries . an integrated paper company , for instance , owns forests , mills , pulp factories , and paper plants in what amounts to a very big bet that the paper company can run all those disparate activities better than smaller , specialized firms . enron argued that integrated firms and industries are riddled with inefficiencies stemming from bureaucracy and the captive nature of " customers " and " suppliers . " enron envisioned creating free markets for components within the integrated chain on the bet that the free - market terms would be better than those of the internal operations . the development of free - market benchmarks for the terms by which divisions of integrated firms do business with each other is very healthy for the economy .
- - exploiting the optionality in networks . in the old regulated environment , natural gas would be supplied to a customer through a single dedicated pipeline . enron envisioned a network by which gas could be supplied from a number of possible sources , opening the customer to the benefits of competition , and the supplier to the flexibility of alternative sourcing strategies . enron benefited from controlling switches on the network , so that they could nimbly route the molecules or electrons from the best source at any moment in time to the best use , and choose when and where to convert molecules to electrons . this policy , picked up by others in the industry , created tremendous value for both customers and suppliers .
- - rigorous risk assessment . the strategy of tailored contracts could easily have broken the firm in the absence of a clear understanding of the trading risks that the firm assumed , and of very strong internal controls . enron pioneered risk assessment and control systems that we judge to be among the best anywhere . particularly with the advent of enron online , where enron made new positions valued at over $ 4 billion each day , it became essential to have up - to - the - second information on company - wide positions , prices and ability to deliver .
the unexpected bad news from enron has little to do with trading losses by the firm , but with fears among trading partners about enron ' s ability to finance its trading activity . in a world where contracts and trading portfolios are too complex to explain in a sound bite , counterparties look to a thick equity base for assurance . it was the erosion in equity , rather than trading risk , that destroyed the firm .
- - a culture of urgency , innovation and high expectations . enron ' s corporate culture was the biggest surprise of all . the hollywood stereotype of a utility company is bureaucratic , hierarchical , formal , slow , and full of excuses . and the stodgy images of a gas pipeline company - - enron only 15 years ago - - is even duller and slower . enron became bumptious , impatient , lean , fast , innovative , and demanding . it bred speed and innovation by giving its professionals unusual freedom to start new businesses , create markets , and transfer within the firm .
success was rewarded with ample compensation and fast promotion , and an open - office design fostered brainstorming . the firm ' s organization and culture was by all accounts not a safe haven for those who believe the role of a large corporation is to fulfill entitlements for jobs . this was a lightning rod for the firm ' s detractors . and yet , it could serve as a model for more hide - bound enterprises to emulate .
enron was a prolific source of compelling new ideas about the transformation of american business . it created a ruckus in once - quiet corners of the business economy . it rewrote the rules of competition in almost every area in which it did business . it thrived on volatility .
the proposed sale of enron to dynegy risks the loss of a major r & d establishment , especially given dynegy ' s track record as a second mover following enron ' s lead . beyond what is likely to be a difficult and time - consuming antitrust review , dynegy ' s greater challenge will be to find a way to make enron ' s spirit of innovation its own . or so we all should hope , because prosperity depends on the ability of firms to reinvent themselves and remake their industries .
- - -
messrs . bodily and bruner are professors at the university of virginia ' s graduate school of business administration .
copyright ? 2000 dow jones & company , inc . all rights reserved .
j . p . morgan wins ( by not losing as much )
by susanne craig
staff reporter of the wall street journal
11 / 19 / 2001
the wall street journal
cl
( copyright ( c ) 2001 , dow jones & company , inc . )
you know things are bad on wall street when the winner of a stock - selection contest can ' t come close to breaking even .
j . p . morgan chase & co . ' s portfolio was the only one in the wall street journal ' s quarterly stock - picking survey to slide less than 10 % during the three months ended sept . 30 . the value of its stock basket fell 8 . 6 % during the third quarter .
just six of the 15 financial firms managed to beat the benchmark standard & poor ' s 500 - stock index , which dropped 14 . 7 % during the period . among the star performers that came to j . p . morgan ' s rescue : northrop grumman corp . , sbc communications inc . and procter & gamble co .
" it has turned into a real stock - picker ' s market , " says j . p . morgan equity strategist douglas cliggott . " in the first half , the market bought cyclical stocks , such as credit cards and brokers , in hopes of a recovery . we don ' t think those stocks will get interesting until sometime in 2003 . " instead , the firm ' s portfolio is weighted toward health care and consumer staples , as well as cyclical stocks such as energy and farm equipment .
the quarter was among the roughest in years for wall street investors . the terrorist attacks of sept . 11 helped contribute to the stock - market losses , which drove down the value of all portfolios in the survey , though the markets have since recovered to their pre - sept . 11 levels . the last time the group posted results this bad was during the third quarter of 1998 , during the asian financial crisis .
goldman sachs group inc . and credit suisse group ' s credit suisse first boston finished at the bottom of the pack , falling 23 . 2 % and 30 . 1 % respectively . the performance of last - place finisher csfb was dragged down by losses at companies such as veritas software corp . ( down 72 . 3 % in the quarter ) , praecis pharmaceuticals inc . ( down 64 . 8 % ) and software provider amdocs ltd . ( down 51 % ) .
for csfb , " it was not a good stock - picking quarter , that ' s for sure , " says al jackson , the firm ' s global head of equity research . " it was our tech and telecom . . . and the events of sept . 11 that hurt us . "
credit suisse first boston recently changed the approach to its model portfolio , opting against sector weightings , mr . jackson says . this strategy has hurt csfb in recent quarters , because of the steep slump in areas such as technology and telecom . the firm recently added a number of old economy stocks to its portfolio , such as citigroup inc . , dow chemical co . and gannett co . says mr . jackson : " we are going back to our roots and asking what our best ideas are . "
like csfb , goldman was hit by a drop in the share price of technology companies , such as check point software technologies ltd . ( down 56 . 5 % in the quarter ) . its portfolio was also dragged down by shares of embattled enron corp . ( down 44 . 3 % ) . morgan stanley and royal bank of canada ' s rbc dain rauscher , which placed 6 th and 12 th respectively , also have the energy company on their lists .
in addition to enron , stocks hard it by the terrorist attacks , such as lodging giant starwood hotels & resorts worldwide inc . , walt disney co . and airlines such as skywest inc . , also hurt the portfolio performance of many securities firms .
it is unlikely people will buy any company ' s entire recommended list at one time . the journal survey is intended to give investors an idea of how their portfolio would look if they let the professionals do all the picking . calculations in the quarterly survey , done for the journal by zacks investment research in chicago , take into account capital gains or losses , dividends and theoretical commissions of 1 % on each trade .
overall , edward d . jones & co . , of st . louis , emerged with the most consistent results across the board , placing second in the quarter and for the year . its 85 % return over five years is the best of the group and ahead of the total return for the s & p 500 of 62 . 7 % . perhaps more than any other firm , edwards jones takes a buy - and - hold approach to investing , making very few changes to its portfolio from quarter to quarter , or even year to year .
" it ' s the old story of the tortoise and the hare , and we believe slow and steady wins the race , " says david otto , edward jones director of research . " we are really , really proud of the five - year number . we believe in getting rich , slowly . "
on a quarterly basis , the portfolio of prudential securities inc . , a unit of prudential financial , came in second only to j . p . morgan , falling 11 . 8 % . however , investors sitting with the stocks prudential recommends haven ' t done as well in the long run . the value of its basket of stocks has fallen 45 . 9 % in the past year , finishing ahead of only lehman brothers holdings inc . , which posted a one - year loss of 54 . 9 % .
seven firms managed to beat the s & p 500 index during the past 12 months , which fell 26 . 6 % in the period .
lehman , which finished last in the survey in the second quarter thanks to its heavy weighting in technology , managed to move up in the rankings this quarter . this primarily stemmed from its annual shuffle of the 10 stocks in its portfolio , known as its " ten uncommon values . " this time around , the firm ' s portfolio slipped 18 . 4 % in the quarter , for an 11 th place finish . just one of its 10 stocks , washington mutual inc . , managed to eke out a positive return , of 3 . 1 % . its biggest quarterly loser : energy company mirant corp . , which fell 36 . 3 % in the period .
" it ' s a portfolio that has done decently since the market troughed , " says jeff applegate , lehman ' s chief market strategist . he says he believes the market hit bottom sept . 21 .
- - - brokerage houses ' stock - picking prowess
estimated performance of stocks on the recommended lists of 15 major
brokerage houses through sept . 30 . figures include price changes ,
dividends , and hypothetical trading commissions of 1 % .
- - - - best & worst picks - - - - - - - - - returns - - - - - -
biggest biggest latest one - five -
gain loss qtr . year year
raymond james
caci intl . + 49 . 7 % skywest - 51 . 1 % - 14 . 2 % - 14 . 7 % + 56 . 8 %
edward jones
amr water wk + 20 . 5 celestica - 47 . 1 - 11 . 2 - 18 . 7 + 85 . 1
merrill lynch
triad + 20 . 1 amer . - 34 . 5 - 15 . 4 - 19 . 8 + 64 . 9
hospitals express
ubs warburg
pepsico + 9 . 7 bea systems - 69 . 2 - 12 . 9 - 19 . 9 n . a .
j . p . morgan sec .
northrop + 26 . 6 macrovision - 58 . 5 - 8 . 6 - 20 . 0 n . a .
bear stearns
mbna + 19 . 2 embraer - 60 . 3 - 15 . 9 - 22 . 2 + 50 . 9
salomon s . b .
abbott labs + 8 . 5 hewlett - - 43 . 6 - 16 . 0 - 25 . 0 + 17 . 9
packard
morgan stanley dw
johnson & john + 11 . 2 emc - 59 . 8 - 14 . 2 - 29 . 0 + 33 . 7
dain rauscher
el paso energy + 17 . 4 i 2 - 82 . 6 - 19 . 6 - 32 . 2 n . a .
technologies
a . g . edwards
verizon + 4 . 4 emc - 59 . 8 - 17 . 4 - 33 . 4 + 34 . 8
u . s . bancorp piper jaf .
eli lilly + 9 . 4 emc - 59 . 8 - 22 . 0 - 39 . 9 + 36 . 7
goldman sachs
wal - mart + 8 . 3 check pt - 56 . 5 - 23 . 2 - 40 . 6 + 60 . 0
sftwr
credit suisse fb
johnson & john + 11 . 2 veritas - 72 . 3 - 30 . 1 - 44 . 9 + 38 . 1
prudential sec .
kraft foods + 12 . 9 bmc - 41 . 6 - 11 . 8 - 45 . 9 + 41 . 3
software
lehman bros .
wash . mutual + 3 . 1 mirant - 36 . 3 - 18 . 4 - 54 . 9 + 29 . 6
s holding period may be less than full quarter
n . a . = not available
source : zacks investment research
copyright ? 2000 dow jones section c
german bank is in talks with enron to buy a unit
by suzanne kapner
11 / 19 / 2001
the new york times
page 2 , column 6
c . 2001 new york times company
london , nov . 18 - - a large german bank is in talks to buy wessex water from the enron corporation , people close to the discussions said today .
enron is looking to sell wessex water , of britain , as well as other noncore assets in india and brazil , after a financial crisis nearly brought its main energy trading business to a halt . that crisis led to enron ' s decision earlier this month to be acquired by dynegy inc . , a much smaller rival .
the german bank , westdeutsche landesbank girozentrale of dusseldorf , or westlb , is among several suitors for wessex water , people close to the discussions said . the sale has also attracted the attention of industry rivals like thames water , owned by rwe of germany . but such a combination would most likely incur a long review by regulators , who might either block the merger on antitrust grounds , or exact stiff concessions , industry experts said .
wessex water is likely to be sold for more than $ : 1 billion ( $ 1 . 4 billion ) but less than the $ : 1 . 4 billion that enron paid for it in 1998 , analysts said .
' ' in hindsight , we made some very bad investments in noncore businesses , ' ' kenneth l . lay , enron ' s chairman and chief executive , told analysts in a conference call last week . those investments ' ' have performed far worse than we ever could have imagined , ' ' he said , citing the azurix water business , of which wessex water is a part , and energy assets in brazil and india .
executives from enron were not immediately available for comment today . westlb executives declined to comment .
westlb has been aggressively pursuing acquisitions in britain , bidding for british telecommunications ' phone network and the nation ' s railway tracks controlled by the troubled railtrack , which is restructuring under government supervision . neither of those bids has progressed beyond the initial stages .
last summer , westlb helped finance the management buyout of the mid kent water company through swan capital , its private equity vehicle .
copyright ? 2000 dow jones & company , inc . all rights reserved .
credit markets
bond boom isn ' t likely to lift economy as corporations swap old debt for new
by jathon sapsford
staff reporter of the wall street journal
11 / 19 / 2001
the wall street journal
cl
( copyright ( c ) 2001 , dow jones & company , inc . )
when at & t last week completed the second - biggest bond sale in history - - capping one of the busiest bond periods in years - - it came as welcome news amid fears of a credit crunch . here was new money , meaning new spending on plants , equipment and jobs that could help pull the economy out of its slump .
that $ 10 . 9 billion at & t deal , and a slew of similar bond deals from big companies ranging from boeing and anheuser - busch to kraft foods and general motors , may not provide as big of a boost as economists are banking on . that is because corporations , like homeowners , are in the midst of a refinancing boom .
corporations are hitting the market not just because rates are cheap , but because they often can ' t get money in other crucial markets . in particular , they are sidestepping the commercial paper market - - short - term corporate ious used to finance day - to - day operations , where rates traditionally are lowest - - because investors are unwilling to finance many well - known corporations .
the result has been a huge jump in bond sales , the majority of which are used to reduce existing debt . since the sept . 11 terrorist attacks , about $ 135 billion in investment - grade bonds have been sold , up from about $ 78 billion in the year - earlier period . overall issuance this year is likely to set a record , clearing $ 600 billion , compared with $ 411 billion in 2000 .
" the driving force behind this surge in bond issuance is refinancing short - term commercial paper to long - term debt , " says john lonski , chief economist at moody ' s investors service , a credit - rating agency .
usually , rising bond issuance presages economic growth . in 1991 , corporations sold a record number of bonds to exploit falling interest rates . but then , companies poured much of the money they raised back into their operations , a flurry of investment that foreshadowed the economic boom of the late 1990 s .
this time around , the surge in bond deals won ' t pump in enough new money to the economy to make a dramatic difference . though , as in the case of the millions of homeowners who are refinancing their mortgages to lower monthly payments , it could help ease some pressure on stretched corporate - balance sheets and help to fund some of the companies ' day - to - day operations .
not all of the money being raised is to refinance short - term debt , of course , and the string of bond deals shows that many of the nation ' s biggest borrowers have ready access to funding if they need it .
but most companies are similar to at & t , which last week provided the biggest refinancing example yet .
over the next three months , the telecom company was facing $ 6 . 5 billion in expiring commercial paper . under normal conditions , corporations pay off maturing commercial paper by " rolling over " that debt , or issuing new commercial paper to replace the old . but rolling over commercial paper became much harder for at & t after moody ' s cut the company ' s short - term and long - term credit ratings . through the bond deal , at & t raised money at relatively attractive rates while avoiding the difficulties of the commercial - paper market .
other companies facing downgrades also are scrambling to find alternatives to the commercial - paper market through bonds , loans or revolving credit lines . " the ripple effects of this are being felt throughout the capital markets , " says meredith coffey , senior vice president at loan pricing corp . , a debt - market - analysis company .
for the most extreme cases , the bond markets don ' t offer refuge . enron , hammered by a third - quarter loss of $ 618 million that led to a string of downgrades , drew down $ 3 . 3 billion from its emergency bank credit line to repay investors in its commercial paper . it then turned to its banks for an additional $ 1 billion loan to pay off more commercial - paper investors , thus tiding it over until it could merge with rival dynegy .
most investment - grade companies aren ' t nearly so bad off , and thus have ready access to bond investors . general motors , for instance , had little trouble selling $ 6 billion in debt last month , while ford motor easily sold bonds totalling $ 9 . 4 billion .
but the surge in bond sales masks signs that even investment - grade companies are having trouble convincing investors that they are good for their money .
take ford . standard & poor ' s and moody ' s downgraded ford ' s debt ratings last month to triple - b - plus and single - a - 3 , respectively . with that rating , ford is far enough down the spectrum of investment - grade debt that many of the ultraconservative investors in commercial paper won ' t touch it , meaning that it had to turn to corporate bonds to refinance its debt . ford concedes that a big reason it is selling bonds was to avoid the trouble in the commercial - paper market .
boyce greer , the money - market group leader at fidelity investments , says he often stops buying the commercial paper of a corporation at the first sign of eroding profitability - - even before they get downgraded . " you can ' t wait around for a rating agency [ to downgrade a company ] , " he says .
moody ' s has downgraded five times as many corporations as it has raised so far this year . thus , the market for corporate commercial paper has shrunk to $ 1 . 4 trillion at the end of october , down from $ 1 . 6 trillion at the end of last year .
- - -
friday ' s credit markets
last week was a brutal time to own treasurys . the market sold off so sharply as to push yields , which move inversely to prices , almost back up to where they stood before the terrorist attacks . it was the worst bond selloff since 1987 , according to economists at banc one capital markets .
losses were heaviest in issues like the two - year note , the most sensitive to expectations about federal reserve policy . since hitting a record low of 2 . 30 % on nov . 7 , the two - year yield has risen 0 . 80 percentage point to 3 . 05 % . in the same period , the 30 - year bond yield has risen 0 . 50 percentage point to 5 . 27 % .
at 4 p . m . friday , the benchmark 10 - year treasury note was down 1 3 / 32 points from late thursday , or $ 10 . 94 per $ 1 , 000 face value , at 100 25 / 32 . its yield jumped to 4 . 897 % from 4 . 756 % thursday .
the 30 - year treasury bond ' s price fell 1 19 / 32 to 100 25 / 32 to yield 5 . 317 , up from 5 . 211 % thursday .
why the selloff ? people in the market cite a shift toward the view that the u . s . economy may finally be on the brink of recovery . that means the fed may not need to employ many more rate cuts to get growth back on track .
- - michael s . derby and steven vames
copyright ? 2000 dow jones financial desk
preview / week of nov . 19 - 25 investors looking for answers in enron filing
bloomberg news
11 / 19 / 2001
los angeles times
home edition
c - 2
copyright 2001 / the times mirror company
enron corp . investors hope the energy trader ' s third - quarter report to the securities and exchange commission will answer some of the questions that sent its shares tumbling and led to a proposed sale to rival dynegy inc .
enron , which has been criticized for failing to clearly explain how it makes money , may disclose in a filing expected today more on how much is owed by the company and affiliated partnerships , as well as any planned job cuts and other cost - saving moves related to dynegy ' s $ 24 - billion buyout .
enron agreed to sell after its stock plunged 67 % in three weeks amid an sec investigation into partnerships run by enron executives . investors worry that new disclosures , such as previously unreported debt , might threaten enron ' s credit rating and scuttle the merger , possibly pushing enron into bankruptcy .
enron chairman kenneth lay acknowledged last week that failed investments and a loss of investor confidence forced the sale to dynegy , and he and other executives pledged to be more open with investors .
enron shares fell 48 cents friday to close at $ 9 on the new york stock exchange . dynegy fell $ 1 . 53 to $ 42 . 47 .
enron ' s third - quarter earnings report , which had been expected last week , was delayed by the dynegy talks and a restatement of earnings , chief financial officer jeffrey mcmahon said .
enron reduced net income for four years by a combined $ 586 million to include losses from affiliated partnerships .
today ' s filing , called a 10 - q , will include a balance sheet summarizing assets and debts . enron for years has omitted balance sheets , which the sec requires as part of the 10 - q , from its press releases announcing earnings .
copyright ? 2000 dow jones & company , inc . all rights reserved .
companies & finance international - dynegy bid faces long wait .
by nancy dunne and andrew hill .
11 / 19 / 2001
financial times
( c ) 2001 financial times limited . all rights reserved
dynegy ' s $ 9 . 8 bn rescue bid for enron , the larger rival energy group , poses complex and unprecedented regulatory challenges for the federal energy regulatory commission ( ferc ) , which is likely to lead the review of the bid .
officials from the two houston - based companies , which announced the deal 10 days ago , estimated the regulatory process would take six to nine months to complete .
but the ferc review could take longer , according to experts , and approval of the deal is further complicated by such issues as the parallel securities and exchange commission investigation into enron ' s finances .
" it ' s very complicated . it will be very time - consuming , " said one person close to the ferc commissioners . as of friday , the groups had not yet filed for ferc approval .
" ( the deal ) raises issues that have never been considered before by ferc , " said edward comer , general counsel to the edison electric institute , the association of us electric utilities .
" it has never considered the merger of two huge marketers , and in the past , marketing wasn ' t considered as significant a portion of the energy sector as it has become . "
a typical deal now takes about 200 days to win ferc approval . but mr comer said approval of the dynegy bid could take anywhere from six months to two years .
the agency ' s guidelines prohibit mergers if they give the new company the market power to push prices above competitive levels for " a significant period of time " .
it analyses market power by identifying the products sold , the customers and suppliers affected and market concentration .
" mergers in the past have been considered on the basis of assets , " said patti harper - slaboszewicz of frost & sullivan , a market research and consulting firm . " the rules were written when the industry was vertically integrated . "
now the question is how ownership of energy trading services will be calculated . it could be difficult to assess if the companies are exerting market power because information on the trading books of companies such as enron and dynegy is closely guarded , she said .
the two companies must also win consent from either the justice department or the federal trade commission , and from states where the companies have pipelines and provide retail services .
( c ) copyright financial times ltd . all rights reserved .
http : / / www . ft . com .
copyright ? 2000 dow jones & company , inc . all rights reserved .
fund track
russia fund surges amid global woes
by victoria marcinkowski
dow jones newswires
11 / 19 / 2001
the wall street journal
cl 7
( copyright ( c ) 2001 , dow jones & company , inc . )
everything is relative in the investing world , so with u . s . investors nervous about homeland stocks , european and asian markets sagging and terrorism worries abounding , russia ' s risky markets seem less so these days .
so far this year , pilgrim russia fund , which was bought by ing groep nv late last year , has been the top - performing regional mutual fund , gaining 53 % , according to fund tracker morningstar inc . by comparison , the standard & poor ' s 500 - stock index has slumped nearly 14 % .
of course , the risks in russia remain . despite recent economic gains , the country still is struggling with a weak banking system , inadequate state institutions to enforce contract laws and few businesses run by the " modern " rules of corporate governance , according to samuel oubadia the 37 - year - old manager of the russia fund .
" but they are getting more open , " mr . oubadia said , though russia ' s lax financial reporting standards are still one of the main roadblocks for foreign investors . with $ 49 million in assets , the pilgrim russia fund invests between 90 % and 95 % in russian stock , with the balance held in cash .
" while the global economy is slowing , russia is still in an expansion mode , " mr . oubadia said . after years of economic reforms , consumer spending is up 10 % and the former soviet union ' s gross domestic product is expected to grow 3 % to 5 % next year , more than twice as much as that of the u . s . and europe .
two - thirds of the fund ' s stocks are oil and gas companies , which are still the most liquid stocks in russia . utilities , mining , telecommunications companies and breweries make up the rest . " there ' s no escaping oil and gas if you want to manage a russia fund , " mr . oubadia said .
the spike in oil prices earlier this year made the investment in oil worthwhile , propelling earnings growth for russia ' s oil and gas companies . higher oil prices also worked wonders for the russian economy , which is largely dependent on oil and gas . more recently , however , falling oil prices have threatened the companies ' profit growth .
but the fund manager , who is based in the hague , said he doesn ' t think people should invest in russian oil stocks because of their earnings prospects . " you don ' t invest because of earnings growth - - there will be none for russian oil companies this year . you invest because of the stocks ' low valuation , " mr . oubadia said , adding that most of the russian oil companies still trade well below the world - wide average for the sector .
yukos oil is one of the fund ' s largest investments , making up about 12 % of the fund ' s holdings . surgutneftegaz and lukoil holdings also make up more than 5 % each of pilgrim russia ' s assets . while mr . oubadia said the companies should be able to handle falling oil prices , partly by cutting production , he worries that further price erosion could hamper a fragile russian stock market that relies so heavily on oil and gas stocks .
" can russian markets do well with lower prices for oil ? " he asked . " the short answer is yes . but how low will prices drop ? " mr . oubadia acknowledged that weak oil prices might cause him to shift some investments from oil and gas into other russian sectors , including telecom stocks and consumer products .
the russia fund isn ' t for the timid . in 1998 , when the russian economy collapsed , the fund - - then called lexington troika dialog russia , lost 83 % of its value . a year later , the fund soared 160 % . in 2000 the fund finished down almost 18 % .
- - -
janus stock shuffle : janus capital corp . bulked up on lower - priced value stocks and shed some shares of its long - held technology companies during the third quarter , a new securities and exchange commission filing showed .
the denver fund firm reported that during the third quarter , it lowered its investments in 14 of the 20 largest holdings it had owned as of june 30 . the largest reduction was a 43 . 6 million - share sale of nokia corp . stock . after the sale , janus still owned a large 183 . 2 million - share position in the wireless - phone company at the end of the third quarter .
during the quarter , janus also sold more than half of its stakes in tech companies emc corp . and sun microsystems inc . in addition , the fund company , a unit of stilwell financial inc . , trimmed its exposure to energy company enron corp . , selling 1 . 5 million shares to reduce its overall position to 41 . 4 million shares at the end of september .
on the buying side , janus , one of the hottest fund firms of the late 1990 s thanks to bets on leading technology stocks , about doubled its position in software company microsoft corp . it also boosted its holding in the investment company run by warren buffett , berkshire hathaway inc . , while starting a small position in philip morris cos . , whose dividend - rich stock is usually more popular with price - sensitive " value " managers . janus has introduced new value portfolios recently , but most of its investors ' assets still follow faster - growing companies .
- - aaron lucchetti and todd goren
copyright ? 2000 dow jones source : world reporter ( tm )
the sunday telegraph
the german state - owned bank , westlb , is in talks to buy wessex water from its troubled us parent enron .
westlb is thought to be one of a number of financial buyers to have approached enron with a view to acquiring wessex , which is valued at more than agbplbn ( el . 63 bn ) .
enron , the energy trading group which bought wessex in 1998 for agbpl . 4 bn , is being bought by its much smaller us rival dynegy after collapsing into financial crisis .
the independent on sunday
the water and sewage company wessex water is understood to be up for sale following an offer to take over its owner , enron .
three years ago , enron spent agbpl . 4 bn on wessex water .
but dynegy is understood to want to concentrate on us and european energy assets and is not interested in non - core assets .
any hope to regain the same amount of money could be derailed as the industry is put off by regulatory problems , and the company ' s results have worsened due to imposed price cuts over the past year .
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india bses : dabhol pwr proj due diligence done jan - report
11 / 19 / 2001
emerging markets report
( copyright ( c ) 2001 , dow jones dow jones newswires ; 91 - 11 - 461 - 9426 ; himendra . kumar @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
india dabhol pwr : no termination notice until crt verdict
11 / 19 / 2001
dow jones international news
( copyright ( c ) 2001 , dow jones dow jones newswires ; 91 - 11 - 461 - 9426 ; himendra . kumar @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
financial post : news
fears raised on enron deal : $ 15 . 6 - billion rescue bid
andrew hill and sheila mcnulty
financial times
11 / 19 / 2001
national post
national
fp 3
( c ) national post 2001 . all rights reserved .
new york - companies that trade with enron corp . , the houston , texas - based energy group , are taking precautions in case dynegy inc . , also of houston , withdraws its $ 15 . 6 - billion rescue bid for its rival , a decision that could trigger a crisis in the energy trading market .
counter - parties to enron , which is one of the principal market - makers providing liquidity in the energy market , are seeking to limit their exposure to the group , in spite of reassurances from both enron and dynegy that the takeover will go through .
experts also say the implications of the deal are so complex that the regulatory review could take much longer than the six to nine months company officials have estimated .
analysts say the 27 % spread between the value of dynegy ' s offer price and enron ' s share price suggests a 65 % to 75 % chance the bid will succeed . but bankers and energy executives are still worried about systemic risk , both in the energy market and in financial markets , where companies such as enron use derivatives to offset the risk of energy price fluctuations .
enron was close to meltdown until dynegy stepped in with a rescue bid 10 days ago , having persuaded credit rating agencies not to downgrade enron ' s debt to below investment grade .
clauses built into the merger agreement signed with enron give dynegy the right to walk away under certain circumstances , although the two companies ' officials and advisors differ on how easy it would be for dynegy to pull out .
while the situation remains uncertain , companies that deal with enron are reluctant to lock themselves into long - term contracts to buy or sell power , said john olson , an analyst at sanders morris harris , the investment banking arm of houston , texas - based sanders morris harris group .
keith stamm , chief executive of aquila inc . , the energy marketing and risk - management company , said his company had begun preparing contingency plans in case the deal fell through .
copyright ? 2000 dow jones now a sale has become even more urgent . reportedly , tatas and bses are interested ; so are the lending institutions . clearly , if a settlement is to be reached , this is the optimum time .
but one is not very optimistic . for one , delhi and mumbai will be involved , and bureaucracies never understand opportunity costs . our byzantine decision - making processes make timely decisions impossible . further , if a deal does take place , there will be the inevitable allegations of corruption . it is much safer for the reputation of the concerned ministers in mumbai and delhi to allow the drift to continue , to " let the law take its own course " , whatever the costs ! sadly , as jairam ramesh said in this paper , indian politicians respond to developments only out of compulsion , not conviction .
copyright ? 2000 dow jones & company , inc . all rights reserved .