Financial institutions across the world will no doubt be examining the role letters of credit (L/Cs) played in exposures to the recently collapsed Enron. They may also note that at least one bank used L/Cs to reduce its exposure to the US energy giant.

The impact of the biggest US corporate failure in history will impact on the two New York financial institutions that are Enron's primary lenders. J.P. Morgan Chase and Co. disclosed approximately US$500 million of unsecured exposure, including loans, letters of credit and derivatives. It also reported additional secured exposures, including US$400 million in loans secured by the Transwestern and Northern natural gas pipelines. According to ratings agency Fitch, Citigroup has exposure of approximately US$800 million, with estimated US$300 million unsecured and US$500 million secured.

More disclosures expected

Exposure at other financial institutions according to Fitch is as follows: Abbey National plc (UK) is owed approximately US$165 million by Enron. ABN Amro Holding NV (The Netherlands) may set aside approximately US$100 million to cover possible Enron Losses. National Australia has approximately US$200 million in secured and unsecured exposure to Enron, and other Australian lenders have loans to Enron of an additional estimated US$250 million.

Fitch says Credit Lyonnais SA (France) has US$125 million of unsecured loans to Enron while Dresdner Bank AG (Germany) has exposure of less than US$100 million. Other German banks do not have significant exposure. The ratings agency expects additional disclosures will be forthcoming from international banks.

CIBC (Canada) has approximately US$115 million in senior unsecured loans, L/Cs and derivatives plus additional secured exposure of approximately US$100 million. In addition, Fitch believes that many other large US and Canadian banks have some exposure, although it is expected to be relatively modest for most.

Credit swap

Commonwealth Bank of Australia (CBA) has also been hit by Enron's collapse. According to analysts it had an exposure of A$44 million but CBA would most likely be able to retrieve this because it was backed by a L/C from another bank. Unfortunately for CBA according to the same analysts, the bank had also arranged a credit swap with another institution that left CBA with a A$98 million exposure to Enron.

CBA said in a filing to the Australian Stock Exchange that Enron's 3 December application for protection from creditors under Chapter 11 of US bankruptcy law was expected to crystallise a contingent credit exposure of A$98 million. Apparently if Enron had delayed it's filing under Chapter 11 for one day, the credit swap agreement would have expired leaving CBA with zero exposure to Enron.

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