The Royal Bank of Canada (RBC) yesterday reached a settlement agreement with Enron Corporation, the Enron Creditors' Committee and Netherlands-based Rabobank, resolving aspects of a share transaction known as ‘Cerberus’, which also involved the use of total return swaps for hedging purposes. Under the terms of the settlement, RBC will receive a payment currently valued at approximately $195 million plus interest.The settlement relates to the proceeds of the sale of 11.5 million shares of common stock of Enron affiliate EOG Resources, a publicly traded company. The shares were the subject of the Cerberus transaction, which closed in November 2000. A subsequent total-return swap agreement was entered into with Rabobank, under which Rabobank assumed the credit risk of the transaction and was required to pay RBC $517 million plus interest in June 2002. Rabobank refused to honour the transaction, a matter which is the subject of litigation between RBC and Rabobank.
A total return swap is a form of credit derivative where a counterparty transfers its credit exposure on an asset to another counterparty that in exchange receives a premium equal to the cost of holding the specified asset on its balance sheet.
After Enron filed for bankruptcy, the EOG shares were the subject of a bankruptcy court-approved stipulation among RBC, Enron, the Enron Creditors' Committee and Rabobank. Under that stipulation, the EOG shares were subsequently sold in the third quarter of 2002, and the proceeds of approximately $440 million were placed into a segregated escrow account pending resolution of the claims of entitlement among the parties.
RBC said the settlement announced yesterday, representing proceeds from the underlying collateral, would reduce the principal amount of $517 million plus interest involved in its dispute with Rabobank by $195 million plus interest but would not otherwise affect the ongoing litigation.
Rabobank is also suing RBC, however, alleging RBC entered into the total return swap transaction knowing that Enron was “a corrupt organisation liable to implode at any time”, and that RBC “fraudulently facilitated” Enron’s business by entering into the swap - an allegation RBC is contesting.
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