Enron Corp. on Thursday had good news, announcing that two of its banks, JPMorgan, the investment banking arm of JP Morgan Chase & Co., and Salomon Smith Barney Inc., the investment banking arm of Citicorp Inc., had agreed to provide incremental credit lines totaling $1 billion, secured by Enron’s Northern Natural Gas Co. and Transwestern Pipeline Co. assets. The funds will be used to supplement short-term liquidity and to refinance maturing obligations. However, analysts and credit rating services remained dubious about Enron’s long-term ability to secure cash to operate.

Standard & Poors, which had already cut its ratings on the company, cut long- and short-term ratings again on Thursday and warned another reduction may be called for because of the “uncertainties” surrounding Enron and problems in the capital markets. S&P cut Enron’s senior unsecured debt to “BBB,” which is’ two notches above junk status, from “BBB-plus,” and reduced its commercial paper rating to “A-3” from “A-2.” Earlier this week, Moody’s Investor Service cut Enron’s long-term debt to “Baa2,” which is also two notches above junk status and warned of a possible reduction to Enron’s “Prime-2” commercial paper rating (see Daily GPI, Oct. 30).

The credit rating downgrades make it more difficult for Enron to run its day-to-day operations because companies could demand more collateral. If Enron’s credit ratings were to fall to junk status, the once mighty company could be forced to issue more shares and thus devalue its stock even more.

The credit ratings reductions come on the heels of a move by the U.S. Securities and Exchange Commission (SEC) Wednesday to launch a formal investigation of the Houston-based energy trader’s related-party transactions, which basically will give it the power to subpoena Enron documents. Enron this week also set up legal counsel in preparation for the SEC probe, but has offered few details, issuing only written statements to the media. Enron’s share price, which has plunged more than 60% in 11 of the past 12 trading sessions, closed down 13.74% on Thursday from a day earlier to end at $11.99.

“With more than $1 billion in cash currently on our balance sheet, this additional credit capacity will further solidify Enron’s standing as the leading market maker in wholesale energy markets,” Enron Chairman Kenneth L. Lay said in a written statement. “We very much appreciate the support of two of our longstanding banking partners, JPMorgan and Citigroup.”

Enron CFO Jeffrey McMahon called the move “yet another step in our efforts to enhance market and investor confidence,” and said the company was “moving aggressively to strengthen our balance sheet and maintain our investment grade credit rating.” In the written statement, Enron said that copies of the commitment letters will be filed with the U.S. Securities and Exchange Commission in a Form 8-K filing soon. The SEC did not comment.

Following the announcement by Enron, Merrill Lynch downgraded the stock to “neutral” from “accumulate” and UBS Warburg lowered its 2001 recurring earnings per share estimate to $1.75 from $1.80. UBS analyst Ronald Barone said “though Enron’s wholesale and retail franchises appear alive and well, the reductions reflect the likelihood that the company will experience increased overall borrowing expenses, some level of decreased employee productivity and some decline in transactional margins as certain counterparties may opt for shorter duration transactions.”

Barone also spelled out the risks involved in investing in the acknowledged energy trading leader, noting before it had been done Thursday afternoon that “we would not be surprised to see S&P and Fitch lower their debt ratings on Enron a notch or so to a level still within investment grade status” and said that “another one notch move by Moody’s can also not be ruled out.”

Merrill Lynch’s energy analyst Donato Eassey noted, “ultimate outcome and underlying fundamentals aside, we believe significant pressure and uncertainty will remain for Enron until the [SEC] investigation concludes.”

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