Iris

From the initial work that I Ben and I have done, data availability for the Moody's model is relatively good for European companies. However, there are problems for certain jurisdictions (e.g., the Netherlands) where reporting requirements are low. Also, all newly established entities with no accounts cannot be priced.

You may be aware that S&P has a similar model. You can find the description at www.creditmodel.com. We met with S&P earlier this morning and they will give us logins that I will forward to you. I have not looked at the details, but it appears to me that the Moody's model could be more relevant for our purposes as the S&P model is calibrated of companies that S&P has rated, whereas Moody's has actually got data not only retsricted to the firms they rate. Moreover, the S&P threshold USD 100m) is very high.

For US counterparties, there may be a problem as private US firms do not need to publish accounts. In any case, quality data is probably one of the most important issues to be resolved going ahead, and this is likely to define what companies we will be able to price and influence model selection. Therefore when you (or someone else) examines potential data sources/vendors please keep Eric Kirkpatrick and Mike Mumford in the loop to ensure full co-ordination

Regards

TV





---------------------- Forwarded by Tomas Valnek/LON/ECT on 18/04/2001 11:25 ---------------------------


Ben Parsons
18/04/2001 08:22
To:	Tomas Valnek/LON/ECT@ECT
cc:	 

Subject:	Data for Moody's RiskCalc

FYI
---------------------- Forwarded by Ben Parsons/LON/ECT on 18/04/2001 08:23 ---------------------------
From:	Iris Mack/ENRON@enronXgate on 17/04/2001 19:19 CDT
To:	Craig Chaney/HOU/ECT@ECT, Kim Detiveaux/ENRON@enronXgate
cc:	Amitava Dhar/Corp/Enron@ENRON, Vasant Shanbhogue/ENRON@enronXgate, Vince J Kaminski/HOU/ECT@ECT, Ben Parsons/LON/ECT@ECT, Mike Mumford/LON/ECT@ECT, Scott Salmon/EU/Enron@Enron 

Subject:	Data for Moody's RiskCalc 

Craig and Kim,

	As you know,  I have obtained a 60 day trial subscription to Moody's RiskCalc.

	You wanted to know if it makes sense for Enron to purchase RiskCalc.

	Well, after plowing through their 100 page manual and sitting through today's 2-hour Moody's presentation, it is necessary for us to have information about Enron's counterparties to move to the next step with RiskCalc.

	We have obtained some information on Enron's European counterparties from our colleagues in the London office.

	We need for you and/or your colleagues in the Houston office to supply us with a list of Enron's North American counterparties.  

	More specifically, to evaluate Moody's RiskCalc we will need the following financial inputs for Enron's North American (private firm) counterparties:

		
 	
Fiscal Year
The prior twelve months of financial data are represented. Annual statements are usable as well as quarterly statements after summing the flow variables, such as cost of goods sold, net income, sales, and EBIT. The value should be a four-digit integer year without mention of the day or month such as 1999 or 2000. Forecasts until the year 2009 can be made. A constant rate of inflation is applied to future years using last year's (1999) inflation level. In general this 'estimation error' will not cause any great problems, as size affects default rates at very large scales (e.g., $10,000,000 vs. $1,000,000 makes a significant difference, $1,000,000 vs. $1,050,00 does not). 

Cash & Equivalents
This measure of liquid assets includes cash and marketable securities. 

Inventory
Inventories are taken directly from the balance sheet, in thousands dollars, without any alterations for accounting method (e.g., LIFO, FIFO, Average Cost). This item represents merchandise bought for resale and materials and supplies purchased for use in production of revenue. Specifically this would include purchase cost, sales cost, sales taxes, transportation costs, insurance costs, and storage costs.

Current Assets
This item primarily represents cash, inventories, accounts receivables, marketable securities, and other current assets. 

Total Assets
Total Assets and every other variable are entered in thousands of dollars. For example, $15,500,000 should be entered as 15500. Specifically, total assets are the sum of current assets plus net property, plant, and equipment plus other noncurrent assets (including intangible assets, deferred items, and investments and advances). Leave previous year's total assets blank for Australian companies. 

Current Liabilities
Liabilities are positive values. Included in current liabilities are short-term debt, accounts payable, and other current liabilities. 


Total Liabilities
This balance sheet account, total liabilities, is a positive number representing the sum of current liabilities plus long-term debt plus other noncurrent liabilities (including deferred taxes, investment tax credit, and minority interest). 


Retained Earnings
Retained Earnings, a historical measure of performance, is the cumulative earnings of the company less total dividend distributions to shareholders. Typically, it is the prior year's retained earnings plus net income less distributions. Retained earnings are generally positive. Some firms with low credit quality will have negative retained earnings. Leave this field blank for Australian companies. 

Sales
This item consists of the industry segment's gross sales (the amount of actual billings to customers for regular sales completed during the period) reduced by cash discounts, trade discounts, and returned sales and allowances for which credit is given to customers. 

Cost of Goods Sold
Entered in thousands of dollars, this value is generally a positive number less than sales. It represents all costs directly allocated by the company to production, such as material, labor, and overhead. Not fixed overhead or items that would be included in Selling, General, and Administrative Expenses. Leave this field blank for Australian companies. 

EBIT
Earning before interest expense is operating income after depreciation. It can be positive or negative but is usually greater then net income. 

Interest Expense
This item represents the periodic expense to the company of securing short- and long-term debt. Typically, we expect this charge to be approximately the prevailing interest rate times the total liabilities. One measure of computing this is: Interest Expense = 0.07 * total liabilities. 


Net Income
This item represents the income (or loss) reported by a company after expenses and losses have been subtracted from all revenues and gains for the fiscal period including extraordinary items and discontinued operations. A loss is represented by a negative sign. For example, a $5,000,000 loss would be entered as -5000. Leave previous year's net income blank for Australian companies. 



Extraordinary Items
Positive or negative, this item represents unusual items that sometimes appear on the income statement. The items are designated by the company as extraordinary and presented after net income from continuing operations and discontinued operations. These items include extraordinary gains/losses, income (loss) from discontinued operations, and cumulative affect of accounting changes. Expenses are entered as negative values, gains as positive values. Leave previous year's extraordinary items blank for Australian companies. 


Country
This model is calibrated for the United States, Canada, and Australia. 


	We look forward to receiving this information for Enron's private firm North American counterparties so that we can move on to the next step with the evaluation of RiskCalc.


Thanks,
Iris