Enron collapse affects convertible market, mostly hedge funds, but not seen as huge event

By Ronda Fears

Nashville, Tenn., Nov. 30 - Enron Corp.'s collapse, while seemingly sudden and shocking as one of the largest U.S. bankruptcies on record if or when it comes to pass, is a disaster but the convertible market essentially is shrugging it off as business as usual. The roughly $2.75 billion (face) of convertibles issued by Enron is not a huge dent in the market, and is not expected to affect many individual players to a large extent and most of those are hedge funds.

"We can't say this is nothing, I mean you can't ignore it, but it's not really that big a deal. It will have an impact, but I don't believe it will be very much," said Tom Dinsmore of Davis-Dinsmore, which manages the Bancroft Convertible Fund, among others.

"The vast majority of the losses took place months ago. The convertible market is absorbing it."

The Enron zero-coupon convertible due 2021, which was issued at 65.52 with a 45% initial conversion premium, was flat Friday after plunging to 13.5 as the week's events unfolded. Enron common shares dropped 9c to 27c. Enron's $255 million of 7% mandatory exchangeables due 2002, which convert into Enron Oil & Gas shares, lost another 0.92 point to 3.68 as Enron Oil & Gas stock dropped 18c to $35.

"You're destroyed if you were heavy in this," said a hedge fund trader in Connecticut. "At the very best you got out several months ago and broke even. Right now the bond is worthless and the common is worthless, so you lost money on either side."

Hedge funds were the big players in the Enron zero-coupon convertible, which was just issued in late January, and brokers may have some exposure with those bonds. The issue has a contingent conversion feature that turned many traditional convertible investors away. But many traditional convertible investors hold the Enron exchangeables, which were issued in 1999.

"One of the reasons the convertible market isn't going to have a big problem with this is because it wasn't in the hands of the regular players in the convertible market," Disnmore said, of the Enron zeroes. "The other is that it was a pure hedgie creature. The contingent conversion feature really only makes sense to hedge funds and people who are not interested in moderate income."

Hedge funds similarly agree with Dinsmore that the Enron factor will be personal but not something that debilitates the market like the Long Term Capital Management event that crippled the market for months.

"Sure, this is a big deal if you're holding the paper. But, say you are and Enron accounts for 2% of your portfolio, then that's not such a huge thing," said a hedge fund manager in New York.

"This could mean hedge funds are slower to buy into new issues, but I don't believe that's going to happen. Both of the new deals out this morning went well, apparently, since they were priced fairly aggressively. What is more likely is that people are just going to be more diligent in doing their homework and not get involved in a situation that they don't understand."

Indeed, Dinsmore said investors will be more meticulous about the due diligence that they are required and obligated to do before participating in a new deal or any investment. "You kind of have to, because here's a BBB company about to go bankrupt," Dinsmore said.

Dinsmore holds the Enron exchangeable, but passed on the Enron zero issue mainly because like many others he couldn't understand a lot of Enron's business. "I didn't know how they were making money," he said. "I understand Enron Oil & Gas, it's straightforward. But nobody has really got a handle on this yet. It's not clear exactly what was going on."

The exchangeable issue has kept falling, although Enron Oil & Gas common shares are fairly stable and unaffected directly by the former parent's debacle, because of the uncertainty at Enron. The issue is a debt obligation of Enron and the Enron Oil & Gas shares are an asset of Enron. Should the two be separated, whereby the asset could be liquidated to meet Enron's general obligations, rather than the specific debt itself, then the holders of the exchangeables cannot hope for much recovery.

End

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