Credit rating agency Fitch Thursday placed Enron Corp. securities on watch for a potential downgrade and shares of the beleaguered Houston energy merchant closed down for a seventh straight session.
The stock closed at $16.35/share, down 6¢, after trading as high $17.95 during the day. Nearly 40 million shares were traded, compared to average volume of about 6.5 million shares.
Fitch’s action was taken 1 day after Enron replaced chief financial officer Andy Fastow, the latest in a 2-week series of events that have cut the company’s market capital by half. The move came after a conference call Tuesday failed to restore investor confidence.
Fitch said continued loss of confidence would impair Enron’s financial flexibility and access to capital markets. In addition, Fitch said, concerns have been expressed about certain structured transactions, including Marlin Water Trust II and Osprey. They have debt totaling $3.2 billion, Fitch said.
The rating agency said Enron hasn’t verified the underlying assets have adequate market value to fully pay down the associated debt. Enron reported a $1.2 billion reduction in balance sheet equity related to unwinding of various off balance sheet transactions Oct. 16 and a $1 billion after-tax charge to earnings to be taken in the third quarter.
Various sources of repayment exist, Fitch said, but primary credit support comes from Enron’s obligation to sell stock, if the company can’t repay the notes. The money must be deposited with a trustee 120 days prior to maturity or in the event of a “trigger” event, Fitch said.
A trigger event includes a downgrade of Enron’s senior unsecured debt below investment grade by one of the major credit rating agencies in conjunction with specified declines in Enron’s closing stock price over 3 consecutive trading days. Fitch said the company would have up to 60 days to register new shares.
Fitch said it had no information to indicate there are fundamental problems with any of Enron’s core businesses but will continue to monitor ongoing events.
Analysts continued to call on the company to be more forthcoming about its off-balance sheet deals. A number of shareholder lawsuits against the company have been filed, and Monday Enron reported the Securities and Exchange Commission has asked for details of the Fastow related-party transactions. Enron said it would cooperate.