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Banks can't walk away from Enron

Think Enron Corp, which recently filed for the largest bankruptcy in US history, would have trouble raising cash?

Think again.

The troubled energy trader, which is embroiled in a high-stakes legal battle against former merger partner Dynegy Inc, managed to score $1.5 billion in emergency funding from two of the nation's largest banks, Citigroup Inc and J P Morgan Chase & Co Inc.

The two banks have already loaned Enron billions of dollars, and they have to keep lending or face dropping to the bottom of a long list of creditors. At the same time, Citigroup and J P Morgan are working hard to spread the risk of these new loans by signing up other banks and securing the loans with Enron assets like pipelines.

"It's not a matter of choice," said Frank Barkocy, head of research at Keefe Managers, a New York investment company that owns shares of Citigroup. "They're exposed to these situations, the loans are out there."

If Citigroup and J P Morgan abandoned their positions as Enron's leading creditors, repayment of their earlier loans becomes less of a priority, as new top credit providers would step to the front of the line, said Diana Yates, an analyst at A G Edwards.

"This (new) loan is going to take priority or take senior position over others," she said.

SHARING THE RISK

Citigroup and J P Morgan both declined to comment on their future plans regarding financing. They provided Enron with an immediate $250 million after Sunday's bankruptcy filing and will hand over another $250 million as soon as the company provides lenders with a satisfactory business plan.

They will also provide an additional $1 billion in credit after they syndicate the bulk of the loan by redistributing it among other lenders.

All of the $1.5 billion will be fully secured by Enron's remaining assets, one J P Morgan source said.

And J P Morgan is confident it will find enough of Enron's old creditors to take part in the newest financing, as Enron will only be able to pay off past debts if it gets fresh capital, the source said.

Enron will likely pay 3.5 percentage points above the London Interbank Offered Rate, a benchmark short-term interest rate that currently stands at about 2 per cent, said a source close to the financing -- a pretty good deal considering that Enron's debt rating was cut to "junk" status last week.

Troubled telecom equipment maker Lucent Technologies Inc, which has a higher debt rating than Enron, paid about the same rate when it sought additional financing this summer.

BANKS COULD OWN PIPELINE

Citigroup and J P Morgan provided Enron with a $1 billion joint line of credit at the time of the Dynegy merger announcement, secured in part by Enron's Northern Natural Gas pipeline.

The banks argue that they have first dibs on the pipeline, if seizing it as collateral is their only alternative, because secured debt takes precedence in a bankruptcy filing.

That argument could eventually pit the banks against Dynegy, which says that its own $1.5 billion equity investment in Enron -- in exchange for an option to buy the pipeline -- gives it top rights to the facility.

Both banks have said they expect to be paid one way or another, whether Enron or Dynegy owns the pipeline. But the Enron-Dynegy legal squabble could take years to settle in court, putting the future of the pipeline in doubt.

If Enron keeps the pipeline but goes belly-up, the pipeline becomes the banks' property. But don't expect Citigroup and J P Morgan to go into the energy business.

"I'm sure they would liquidate it to get their funds back out of it," Yates said. "They wouldn't own it for very long."

POTENTIAL CHARGE-OFFS RELATIVELY SMALL

Wall Street does not worry much about potential losses for Citigroup and J P Morgan from the Enron debacle. Losses, if any, are manageable and are likely to be one-time events, analysts say.

"If you look at the impact overall on the domestic banks that are exposed, Citi and Chase are not really in dire straits," said Barkocy.

Most analysts, including Yates and Barkocy, estimate Citigroup's quarterly earnings could be reduced by as much as 5 cents a share, or 6 per cent of expected earnings, by the Enron troubles. J P Morgan's bottom line could be hit by 10 cents a share, or 20 per cent of expected earnings, they said.

That works out to a total of about $460 million, based on Citigroup and J P Morgan common shares outstanding. Such a sum would cripple smaller institutions but is a relatively small bump in the road for the two financial services giants.

"It's (the Enron situation) been more of a distraction," Yates said. "It comes at a time when expectations were pretty low to begin with."

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