Hedge funds try to block RBC's Enron settlement

Date: Wednesday, September 3, 2003

By KAREN HOWLETT - Globe & Mail - Wednesday, Sep. 3, 2003. A long-simmering dispute involving $440-million (U.S.) worth of stock in an Enron spinoff is back in court, with a group of hedge funds led by Silvercreek Management Inc. of Toronto attempting to block a proposed deal that would see Royal Bank of Canada receive nearly half the funds. Silvercreek filed a motion in U.S. bankruptcy court yesterday, objecting to RBC receiving about $195-million in cash and debt as part of a proposed settlement with Enron Corp. and Dutch financial services giant Rabobank Group. An RBC official declined to comment on the latest twist in its dispute with the hedge funds over a block of shares in oil and gas company EOG Resources Inc., one of Enron's publicly traded spinoffs. The shares have been at the centre of rival bids by RBC and Rabobank on one side and four hedge funds led by Silvercreek on the other since shortly after Enron filed for bankruptcy protection in December, 2001. Since March, 2002, proceeds totalling $440-million from the sale of the EOG block of shares have been held in escrow, pending a resolution of the competing claims. The hedge funds claim they are owed $402.6-million by Enron. Silvercreek says in the motion that court approval of the proposed settlement with RBC will "extinguish" the hedge funds' ability to "prosecute their claim to the entirety of the EOG common stock proceeds, irrevocably reducing their claims to those of general unsecured creditors." In such a scenario, the funds stand to recover only about $68-million, or 17 cents on the dollar, the motion says. "Such a dramatic impact cannot be sanctioned by the court without careful analysis of competent evidence in a thoughtful and complete process," the document adds. The competing claims for the block of shares arose because Enron used the same asset -- its 9.9-per-cent equity stake in EOG Resources -- to support two separate transactions. The hedge funds invested $175-million in Enron unsecured notes in October, 2001, helping the Houston energy company raise $256-million. The funds have suffered huge losses on the notes, where were supposed to be exchanged into EOG shares in July, 2002. The same block of shares was also used to support a $517-million loan made by RBC to an Enron special-purpose trust in November, 2000. Enron pledged the EOG shares against the loan. RBC soon after traded the risk in a swap transaction with Rabobank, leaving it embroiled in a bitter lawsuit with the Dutch bank. The settlement RBC reached last month would shrink the size of its Enron-related claim to $322-million from $517-million. An Enron entity used the $517-million to finance the purchase of the EOG shares from Aeneas LLC, one of thousands of limited partnerships created by the company.