US and European banks and bondholders lent an estimated $500bn to the crippled US gas and power sector, new research commissioned by the Financial Times reveals. The figure raises fears that a further string of corporate failures in the wake of the Enron scandal would expose lenders to heavy losses.
Dynegy and Williams, which have combined debts of more than $20bn, are among those that could be forced into bankruptcy following the collapse of their energy trading markets and a crisis of investor confidence.
Although the energy trading companies are under the most immediate pressure, the fall in electricity prices is hitting the finances of the entire US gas and power sector which SNL Financial, an independent research firm, estimates had total debts of $450bn at the end of last year.
Karl Miller, who set up Enron's European trading business and is now a consultant to distressed energy companies, claims these figures underestimate the total exposure because of large amounts of undisclosed, off- balance sheet debt.
"Managements continue to hide the ball from the capital markets. Managements have signed off on overly aggressive, fraudulent transactions and they have not been willing to take these big writedowns."
Some industry insiders believe the write-offs faced by banks and bondholders could exceed the losses caused by the collapse of WorldCom and Global Crossing. The two US telecommunications companies filed for bankruptcy with combined debts of $44bn.
"We are past the point of no return on significant levels of debt default in the energy industry, which will dwarf WorldCom and Global Crossing," said Mr Miller. "There is no doubt we will see multiple bankruptcies shortly."
US energy companies borrowed heavily in the late 1990s to take advantage of deregulation, investing in infrastructure and building up trading operations.
The debt of the top eight energy traders soared by 200 per cent to $115bn in the three years to May 2002, according to SNL Financial. Lenders were attracted by the strong earnings growth shown by the companies based on optimistic forecasts of future US power prices.
Following the fall in power prices, the companies - including Calpine, Reliant, Mirant, Aquila, El Paso, Duke and AES - are now struggling to support their borrowings as cash flow dries up and other sources of credit are closed off.
The banks most active in arranging finance to the sector include Citigroup and JP Morgan Chase - both under scrutiny over their role in the funding of Enron - and Bank of America.
It is unclear how much energy company debt these banks have retained and how much they have passed on to other lenders. In the case of failed telecoms companies, much of the debt was sold by banks to other investors.