9 At the time Enrons share price was 68 The option was structured that as long

9 at the time enrons share price was 68 the option

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9 At the time Enron’s share price was $68. The option was structured that as long as Enron stock did not decline below $57.50 a share, it would expire after six months. In fact, the option was settled in August. 10 Enron had contributed stock under an agreement that its total value would amount to $1 billion. As the market value of Enron shares declined, this required that increasingly larger amounts of stock had to be supplied. Eventually, this proved impossible and contributed to the decision to unwind the raptors. 11 The name “Hawaii 125-0” was based on the old television show “Hawaii 5-0”, with a sly reference to Statement of Financial Accounting Standards 125, according to (Smith (2) 2002) 9 Enron Harrier LJM2 Talon (SPE) 100% Onwership $41M Premium on Put Shared Settled Pot LLC Interest Promissory Note $50M Enron Stock and Stock Contracts Promissory Note $50M $1,000 Cash Derivative Transactions $30M LLC Interest Fair Market Value Put of LLC Interest
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make a public offering of TNCP at a price between $18 and $20 one week later. The actual price for the IPO was $21 per share, closing at $27 on the issue date. Exhibit 5: Raptor III (Porcupine) Source: Powers p. 116 As with Raptor I, the outside partners contributed $30 million to each of the raptors and received $41 million from Timberwolf and Bobcat and $39.5 million from Porcupine, one week after making the investment. The investment in Porcupine generated an internal rate of return of 2500% for LJM2 (Powers, p.118) Hedging Activities and Revenue Recognition from the Raptors The purpose of the Raptors was to protect Enron’s financial statements against fluctuations in the market value of Enron investments that had to be “marked to market”. Enron entered into about 20 hedges with the Raptors; by November of 2000 they had a notional value of $1.5 billion. As a result, Enron offset losses in its investments of $500 million by corresponding gains on the hedges. 12 Following are two examples: Talon and Avici : Talon was used to hedge Enron’s investment in Avici Systems, Inc. (Avici), an Internet architecture firm. Enron owned a large share of the company’s stock and on September 15, 2000 it entered into a total return swap with Talon on Avici stock. At that time Avici traded for about $95.50 a share. However, the swap agreement was dated as of August 3 rd . This was also the day on which Avici stock traded for $162.50 per share, its all time high. By September 30 when Avici had dropped to $95 a share, Enron offset $75 million in losses as a result of the swap. 13 Porcupine and TNCP : Enron and Porcupine entered into a total return swap on $18 million shares of TNCP stock at $21 a share. This enabled Enron to lock in a gain on its transactions with Hawaii 125-0 in the amount of $370 million. Problems with the Raptors The Raptors were designed to protect Enron’s financial statements against losses from declines in the market value of a variety of investments held in its “merchant portfolio”. This depended on the credit worthiness of 12 For a detailed description of Enron’s transactions with the Raptors see Enron’s Form 10Q, pages 22 through 24.
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