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Derivatives

Credit Derivatives Pros Shun Enron As Investigation Widens

Credit derivatives market makers and end-users in New York and London have stopped entering derivatives transactions with Enron--or at least severely curtailed their activities-- in the wake of a Securities and Exchange Commission inquiry into the company and the possibility of further credit downgrades. Alex Parsons, spokesman at Enron in London, admitted that credit lines to Enron are constrained but said it still has access to the derivatives markets.

"We are not extending any credit lines at the moment and given the circumstances we need special permission to do any trades with Enron," said the head of trading at a top tier derivatives house, adding the firm could be forced to unwind swap positions with Enron if it falls below investment grade. Several other traders said no new business was being done. "Another problem for them is that we're coming to year-end and they might be looking to take some profits on trades, but people don't want to trade with them right now," said one. But, "there's always a price," he quipped.

Traders said collateral agreements could not be used in these circumstances because they would have been drafted a long time ago and would now be out of date. One added that Enron has other problems and would likely not have the time to draft new contracts.

The SEC inquiry has sent the stock tumbling to an eight-year low and caused Moody's Investors Service to downgrade Enron one notch to Baa2, two notches above junk status. The SEC upgraded its inquiry to a full-scale formal investigation last week; it had previously been conducting an informal inquiry.

 

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