I have one principal concern in respect of one of the three structures called 
the "Commodity Transit Trade" structure.  The concern relates to the passing 
of title to the metal forming the subject-matter of the contract.  Under this 
structure, MCC sells metal to the counterparty ("Counterparty") on a spot 
basis with payment deferred (Contract 1).  Counterparty simultaneously sells 
back the metal to MCC, also on a spot basis, but not on deferred payment 
terms (the spot payment received Counterparty therefore constitutes the 
finance) - Contract 2. 

The concern is that, as the transaction has been explained to us, there may 
be a delay of two or three days between (i) legal title to the metal passing 
to Counterparty under Contract 1 and (ii) legal title passing back again to 
MCC under Contact 2.  There is therefore a risk that an event could occur in 
the interim which prevents title passing back to MCC.  The most likely event 
would be the insolvency of the counterparty, but other events (eg supervening 
illegality due to the imposition of sanctions) are conceivable.  More 
specifically, a liquidator of Counterparty could seek to disclaim (or set 
aside) Contract 2 if the market price of metal has increased during the 
interim. 

Consequences

The consequences stem from the fact that the metal forming the subject matter 
of these financings will typically be on the high seas bound for a third 
party (ie not counterparty). MCC will have a contractual obligation to 
transfer good title to the metal to that third party.  If title to the metal 
remains vested in Counterparty then Enron cannot fulfil this obligation to 
the third party.  Conversely, if MCC completes the sale to the third party, 
MCC cannot be said to have passed good title to Counterparty under Contract 1 
above.  In other words, MCC could be sued for breach of contract for failure 
to transfer good title to Counterparty or the third party, on the basis that 
it has sold the same goods twice.  

The likely downside is that Enron could be forced to perform both to 
counterparty and to the third party at a loss (or to perform to one and pay 
market damages to the other).  However, there is a remote possibility that 
punitive damages could also be awarded against MCC on the basis that it has 
sold the same goods twice, or possibly on the basis that the transactions are 
not "genuine" sales of goods, but a sham (this danger should not be 
exagerated and is mitigated by the choice of English law as the governing law 
of the contract). 

A further consequence would of course be that the financing itself would not 
be capable of being completed, with the attendant loss of fees/commissions 
etc, but this is probably a minor consideration.

Mitigants?

There are possible mitigants of the risk highlighted above, as follows:

Cross default - Contracts 1 and 2 will include cross default language to the 
effect that if Counterparty does not execute Contract 2, Contract 1 is 
cancelled.  Care should be taken to ensure that this language is wide enough 
to cover all circumstances (eg if Counterparty has "executed" but not 
performed Contract 2, would the cross default apply?).  More significantly, 
even if the cross default language works contractually, it may be overriden 
by the bankruptcy laws of the Counterparty, as invoked by Counterparty's 
liquidator. In other words, the liquidator may be able to "cherry pick" 
Contract 1 while renouncing Contract 2.  This could be checked on a 
jurisdictional basis, if considered appropriate.

As mentioned, English law, as the governing law of the contracts, may 
mitigate the risk described above to some degree, but local insolvency law in 
the country of Counterparty could override the parties' choice of English law.

Probability - As a matter of crude probability, it may be regarded as fairly 
unlikely that, within a narrow window of a few days or so (i) a Counterparty 
goes bankrupt (ii) in a rising market and (iii) its liquidator takes the 
point and insists on performance of Contract 1 while renouncing Contract, 
particularly in light of the fact that Counterparty does not have posssession 
of the metal and possession would be difficult to obtain.  This may be why 
the issue appears not to have arisen under past transactions.  It is however 
no assurance that these circumstances will not arise in the future.

Conclusion

There is a real risk of loss to MCC should the Counterparty go bankrupt after 
Contact 1 above, but before performance of Contract 2.  This risk is most 
accute in a rising market and is relatively unlikely to materialise in a 
given case.  If it does materialise, it is hard to assess definitively the 
possible loss involved, but this would be likely to be, at a minimum, the 
difference between the then prevailing market price and the price of the 
metal under Contract 1.

Please (anyone) let me know if you would like to discuss this before we move 
to a formal DASH.

Thanks

Paul




Olivier Herbelot
01/09/2000 15:00
To: Paul Simons/LON/ECT@ECT
cc:  

Subject: Re: Metal Trade Finance
  

Paul:  Did you have any big concerns from your point of view after this 
morning's meeting ?  Olivier