EnronCredit.com

Managing Risks in Trade Credit:

“After price risk, counterparty risk is the next most significant risk to a trading

operation.”

- Moody’s Investor Services

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Why EnronCredit?

Products and Services

Bankruptcy Hedge

AgendaAgenda

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Have you ever wanted to protect yourself from the risk of

one of your customers/partners/suppliers going bankrupt?

Have you ever wanted to assess the credit quality of a

company at a glance?

Have you ever been frustrated by the time credit

evaluations take?

Have you ever wanted to price incremental new credit lines

to close an originated commodity trade?

Why?Why?

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What Enron doesWhat Enron does

www.EnronCredit.com provides 24/7-available cost of

credit, 2-way transactable prices, and a space on

which to create build user-designed portfolios of names

being covered

EnronCredit provides businesses with the essential

marketplace to value, manage and transfer credit risks

on an “always-on” basis. EnronCredit can work

together with its clients (as it does internally) to

structure an active management program and to

supply the necessary tools.

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What it does for the ClientWhat it does for the Client

Market for risk transfer

Names that may not have rated securities, or difficult-to-find CDS

No physical recovery - no need to disclose underlying exposures

Two-way markets: Client can sell protection to Enron to gain yield

on underutilized credit lines

Markets to diversify risks away from sector/geography

concentrations (e.g., buy protection on Sithe, sell on Raytheon)

Cost of credit that is forward-looking and and is formatted to plug

into investment and risk management analytics

Foundation for an active credit process for the Client: evaluation of

risk transfer pricing, portfolio analytics, position measurements, etc.

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What is it?What is it?

The Enron Cost of Credit (ECC) is a market-based price for trade

credit. It is a measure of the probability of bankruptcy combined with

the historical recovery assumptions for senior unsecured

obligations. The ECC is derived using proprietary techniques which

integrate many sophisticated tools and approaches for evaluating

credit to generate a modeled price for a specific counterparty. The

modeled price is then further calibrated to current indicators in the

debt and equity markets as well as macro economic factors.

Enron makes two-way markets on each of the credit prices it

quotes. This forces the quoted price to be the market clearing price

for each credit. Prices are continually updated during trading hours.

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Extensive commodity market experience and understanding of

associated credit risk– Enron prices credit risk for all its commodity / finance / asset

transactions

Constant investments in risk management architecture and personnel

Ability to provide credit protection on non-rated smaller companies

operating in the energy markets

Ability to act quickly

Continuous development of new and unique products, such as

Bankruptcy Hedge

Why Enron?Why Enron?

Products & Services

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Requested Name (incl. self) The ECC and underlying market pricing give clients the ability to evaluate and

compare their customers and competitors. – This gives our clients deeper knowledge of their operations, the risks they are

taking, the risk-adjusted profitability. – It allows them to make smarter and faster decisions on their business. – Furthermore, it gives our clients insight into the balance sheet strengths of

competition. Clients request new names to be covered - themselves or third parties. For a fee, Enron creates price and covers for one year. The price may be

informational, indicative or firm – depending upon the quality of information

available to Enron. Companies can also volunteer information on the reference

entity when requesting for a price – in particular if they are choosing themselves

to be priced and covered. Limitations can include affiliation, control, lack of information

Valuation ServicesValuation Services

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Requested Portfolios:

Enron offers cost-effective solutions to monitor expected losses and

bankruptcy probabilities, and to evaluate the cost of hedging.

Client provides a portfolio, and reference entity information, if necessary.

Enron provides, by subscription, the technology to price the risks.

Based on the quality of information available, Enron will back its

valuations with firm, indicative or information-only prices.

Price will be maintained for a term that is tailored for each customer.

Credit Evaluation OutsourcingCredit Evaluation Outsourcing

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Together, client and Enron create a framework for valuing and

managing credit risks on a real-time basis. The goal will be to have

client develop commercial activities undelayed by lack of credit

analysis infrastructure.

Enron contributes credit risk pricing, portfolio valuation, risk

transfer capabilities, and advisory on setting risk limits.

Client contributes the underlying commercial risk to be covered, and

final control over risk limits and reporting requirements.

Outsourcing Credit Risk ManagementOutsourcing Credit Risk Management

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Commodity-linked

Project-linked

Weather-linked

Insurance-linked

Stand-alone Needs

Whatever you need

Structured Use of SwapsStructured Use of Swaps

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Web site: www.EnronCredit.com

e-mail: Credit-desk@enron.com

Telephones

Technical enquiries +44 (0)20 7783 5555.

General enquiries +44 (0)20 7783 5151.

Enquiries relating to

specific transactions +44 (0)20 7783 4242

ContactContact

Bankruptcy Hedge

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Purpose:

Provide a tradable product with which a firm can hedge it’s counterparty credit risk

Features:

Credit Event: Bankruptcy

Reference Entity: Counterparty

Notional: Mark-to-Market of Transaction

Term (Years)

Premium (basis points): Cost of swap

Bankruptcy HedgeBankruptcy Hedge

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Viable businesses honor trade obligations

Lenders will restructure debt if business is viable but under financial strain

Well written contracts cover extraneous credit events

Financial loss will only occur if counterpart is insolvent/bankrupt

Publicly observable event

Why Bankruptcy?Why Bankruptcy?

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SWAP SELLER0

100 % Notional

HEDGER

Premium

Reference Entity

2 year Contract

If the reference entity goes bankrupt, the Swap Seller pays the Hedger the entire notional specified in the Swap contract.

Bankruptcy Hedge StructureBankruptcy Hedge Structure

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•Bankruptcy•Swap

•Contract Value •£100m•Expected Recovery •30%•Loss if Default •£70m•Notional •£70m

•Payment from seller •£70m•Payment to seller •0•Net •£70m•Cost •71.4 •bps •(on £70m)

•(50 •bps on £100 m)•Total Cost •£0.5m

•(Swap buyer takes Recovery risk)

ExampleExample

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Enron Bankruptcy

The only credit event required to hedge non-payment risk in trade obligations is bankruptcy/ insolvency.

ISDA Bankruptcy

Failure to Pay

Obligation Acceleration

Restructuring

Repudiation / MoratoriumISDA’s definition is designed to hedge non-payment risk in financial obligations (Bonds, loans, other debt) and mirrors default

language in lending covenants.

} “Technical Defaults”

Credit EventsCredit Events

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Insurance can have limited flexibility Often there is a term mismatch

Making a claim can be slow and difficult

Lots of conditions on what goes into the portfolio and how it goes in.

Who gets the upside in recovered value?

How many customers are excluded?

Impossible to trade: insurance only tae one side

What if the risk is not directly on trade receivables?

How to Compare to Insurance?How to Compare to Insurance?

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Designed to protect the value of bonds Trigger events are tied to bond performance and are numerous

If default occurs, often the security has to be physically delivered to the

protection seller

If swap is financially settled, settlement can be lengthy and complicated

How many of your customers have issued debt securities?

Do you hold those securities?

Is bond default the correct measure of your risk?

Physical delivery may be difficult (vis-à-vis small float) or

impossible

Who wants to take recovery risk?

Illiquid to trade

And CDS?And CDS?

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Defaults and BankruptciesQuarterly, 1973 - 1999

0

10

20

30

40

50

60

70

80

90

DefaultsBankruptcies

Bankruptcy vs. DefaultBankruptcy vs. Default

ENRON EUROPE FINANCE & TRADING LIMITEDRESPONSIBILITY STATEMENT

Enron Europe Finance & Trading Limited (“EEFT”) is regulated in the conduct of investment business in the United Kingdom by The Securities and Futures Authority. Information relating to investments which is contained in the accompanying material has been approved by EEFT as an investment advertisement for the purposes of Section 57 of the Financial Services Act 1986. The transactions and products which are described therein are of a sophisticated nature and are not being made available by EEFT to private individual investors. The accompanying material is provided solely for the purpose of enabling you to form an opinion as to the suitability or otherwise of your utilising the transactions and products described therein. Nothing stated in the accompanying material shall be construed in any manner whatsoever as meaning that EEFT has considered (i) the appropriateness or suitability for your business of the products described therein or (ii) the appropriateness or suitability for your business of any other characteristic that may be attributed to the products described therein. Nothing stated in the accompanying material shall be construed in any manner whatsoever as meaning that you are placing reliance on the information provided therein as constituting advice given by EEFT to you in connection with your consideration of any such products.