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Linn Energy, LLC (LINE) Message Board

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  • badbernanke badbernanke Nov 22, 2008 11:38 PM Flag

    10Q on Counterparty Risk

    << how to reconcile statements >>

    The counterparty risk analysis is a moving target. Here is what the statement about $8.4 million of credit risk exposure if the counterparties completely failed to perform as of Sept 30 means in the context of the financial statement footnote:

    If you read the entire footnote, you will see that LINE had derivative assets of $299 million and derivative liability of $379 million. That is simply a statement that if all of its contracts in effect at Sep 30 had to be settled as of that date, some of its contracts were assets (meaning that the counterparty would have to pay LINE in the event of settlement) and some of its contracts were liabilities (meaning LINE would have to pay the counterparty in the event of settlement). So lINE had a net liability to counterparties of about $80 million.

    We assume that all counterparties fail to perform.

    LINE can offset the derivative asset balances due from each individual counterparty against the derivative liabilities due to each individual counterparty. But that offset is only available on a counterparty by counterparty basis. You cannot offset a derivative asset owed by Bank A against a liablility owed to Bank B.

    So when LINE says it has $8.4 million derivative credit risk, all it is saying is that if all counterparties failed to perform, it could recover all but $8.4 million of its derivative assets by offsetting them against derivative liabilities. It would have a net liability of $80 million plus it would lose $8.4 million because in its counterparty group, it has some bank or banks which owe $8.4 million more to LINE on derivatives than LINE owes to those banks.

    LINE is not saying that it can offset derivative obligations against credit line balances. In general, that would not be permitted by credit agreements and if banks use different entities -- pne to make loans and another to enter into the counterparty hedge arrangements (which would be the norm), setoff would normally not legally be available.

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