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Fitch IBCA Affirms Enron Ratings, Noting Foreign Exposure

August 31, 1998
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Fitch IBCA Affirms Enron Ratings, Noting Foreign Exposure

Recent uncertainties and declines in the economies of emerging market countries have taken their toll in recent weeks on the stock prices of companies with significant foreign investment exposure. In the natural gas industry that includes Enron Corp., which chose this time period to pledge over $3 billion to additional foreign investments.

Evaluating the international credit risk of Enron Corp. in a research report published Aug. 27 the rating agency Fitch IBCA said it "believes it is appropriate for corporate fixed-income-investors to increase their focus on the credit implications resulting from Enron's significant and growing international presence." The company's stock price has plunged 14 points from mid-July (from above $58 to just over $44 on Friday) when it announced two sizable international transactions, including winning the bid to purchase a controlling interest in Elektro Electricidade e Servios S.A., a Sao Paolo, Brazil distribution company for $1.3 billion in cash, and extending an offer to purchase Wessex Water PLC for approximately $2.2 billion in cash. Enron said it planned to use Wessex to launch a major worldwide water initiative.

The company has power, pipeline and distributor assets in the lower half of South America, as well as power plant projects in India, Guam, the U.K., Turkey, Puerto Rico, Poland and Italy. Fitch IBCA notes that "even with well conceived hedges and risk mitigation techniques, Enron faces significant commercial risk in emerging markets."

The ratings agency affirmed Enron's outstanding securities on July 28, but says "current and historical interest coverage ratios are weak for the 'BBB+' rating category. Fitch IBCA would expect a gradual strengthening during the remainder of 1998 and 1999" based on nonrecurrence of negative events and stronger earnings and cash generation. On the plus side, it cites Enron's strict management of risk in its corporate investment policies and state-or-the-art financial control systems.

Also its commodities trading arm, "Enron Capital &amp Trade Resources (ECT) has an excellent track record in managing its commodity-based portfolio of assets under varying market conditions." Nevertheless, Fitch IBCA cites Enron's "complex and multidimensional" investment strategies and says it can't be sure the risks are balanced. "It is difficult for analysts outside the company to assess and track overall corporate risk using traditional quantitative credit measures based on published data."

Fitch IBCA goes on to note "many of Enron's international transactions have below-investment-grade stand-alone credit profiles," and the company is not always able to hedge risks on a project basis. It does, however, actively manage and diversify risks on a portfolio basis and "except for its out-of-the-markets North Sea J-Block gas contract, the company has yet to suffer any major international credit shocks."

Ellen Beswick

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