> This is probably a silly question but why does a 5-10% fall in stock value
> have to hurt a corporation's debt position? From a debt perspective,
> aren't the important things underlying asset value and cash flow, which
> could conceivably be exactly the same after a 10% fall?
>
Many of the loans or credit facilities extended to these companies were collateralized at least partially by stock with attached trigger levels, inflated stock at that since the highest issuance for the industry occurred around the time of the stock bubble. Enron wasn't the only culprit in that regard. It's kind of similar to executive loans that were backed by corporate stock. So, though cash flow is the most important component of making good on bond interest payments, it's not the only component necessary to maintaining payable terms on loans.
Aside from that, the underlying values of energy company assets have been depreciating substantially. 8 of the top 10 energy companies that sort of became all purpose trading and independent power companies all in one after 96 deregulation, have lost between 80- 90% of their market value over the past year, and particularly the past few months (El Paso, Dynegy, Aquilla, Reliant, Mirant, Calpine, Duke, CMS, Allegheny).
The energy meltdown still to come, caused by some of the same dumb deregulation logic as the telecom one is still percolating. Margin calls on loans will hurt. So, will the heavy debt loads in general - El Paso, for example, second only to Enron in energy trading volume last year (and number one in electricity trading), has $25 billion in debt, had a 4 notch downgrade this week, and William Wise the CEO is stepping down with no replacement in sight - none of it bodes well, or makes additional borrowing easier.
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