Recent uncertainties and declines in the economies of emergingmarket countries have taken their toll in recent weeks on the stockprices of companies with significant foreign investment exposure.In the natural gas industry that includes Enron Corp. which chosethis time period to pledge over $3 billion to additional foreigninvestments.
Evaluating the international credit risk of Enron Corp. in aresearch report published Aug. 27 the rating agency Fitch IBCA saidit “believes it is appropriate for corporate fixed-income-investorsto increase their focus on the credit implications resulting fromEnron’s significant and growing international presence.” Thecompany’s stock price has plunged 14 points from mid-July (fromabove $58 to just over $44 on Friday) when it announced two sizableinternational transactions, including winning the bid to purchase acontrolling interest in Elektro Electricidade e Servios S.A., a SaoPaolo, Brazil distribution company for $1.3 billion in cash, andextending an offer to purchase Wessex Water PLC for approximately$2.2 billion in cash. Enron said it planned to use Wessex to launcha major worldwide water initiative.
The company has power, pipeline and distributor assets in thelower half of South America, as well as power plant projects inIndia, Guam, the U.K., Turkey, Puerto Rico, Poland and Italy. FitchIBCA notes that “even with well conceived hedges and riskmitigation techniques, Enron faces significant commercial risk inemerging markets.”
The ratings agency affirmed Enron’s outstanding securities onJuly 28, but says “current and historical interest coverage ratiosare weak for the ‘BBB+’ rating category. Fitch IBCA would expect agradual strengthening during the remainder of 1998 and 1999” basedon nonrecurrence of negative events and stronger earnings and cashgeneration. It cites Enron’s strict management of risk in itscorporate investment policies and state-or-the-art financialcontrol systems.
Also its commodities trading arm, “Enron Capital & TradeResources (ECT) has an excellent track record in managing itscommodity-based portfolio of assets under varying marketconditions.” Nevertheless, Fitch IBCA cites Enron’s “complex andmultidimensional” investment strategies and says it can’t be surethe risks are balanced. “It is difficult for analysts outside thecompany to assess and track overall corporate risk usingtraditional quantitative credit measures based on published data.”
Fitch IBCA goes on to note “many of Enron’s internationaltransactions have below-investment-grade stand-alone creditprofiles,” and the company is not always able to hedge risks on aproject basis. It does, however, actively manage and diversityrisks on a portfolio basis and “except for its out-of-the-marketsNorth Sea J-Block gas contract, the company has yet to suffer anymajor international credit shocks.”
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