Creating a Financial Brokerage for Asset Backed Securities Internal Presentation

1. Creating a Financial Brokerage for Asset Backed Securities Internal Presentation By: Kara Knop April 6, 2001 (DRAFT) CONFIDENTIAL

2. Agenda • Background • Situation • Complication • Comm’l Idea – ENE Brokerage SPV • Rewards / Risks • Next Steps • Appendix CONFIDENTIAL

3. Background • Issuers Seek Asset Liquidity by: • “Factor” / Securitize Receivables • Investors Seek: • Credit-worthy, predictable payment streams • Investment portfolio diversification • Dealers (I-Banks) Provide: • Financing structure & underwriting • Liquidity as a market maker • Customer support • Issuer’s product demand Issuers Large Corp’s & Com’l Banks Investors Pension/Mutual Funds Insurance Co’s, Qual. Instit. Investors, Com’l Banks CONFIDENTIAL

4. Background The asset-backed commercial paper (ABCP) market is large & growing rapidly. Source: Federal Reserve Board CONFIDENTIAL

5. Situation Assets providing liquidity are a commodity with quantifiable credit / liquidity risks. Source: Thomson Financial Securities Data CONFIDENTIAL

6. Complication • Market inefficiencies point to opportunities for dealer disintermediation • Dealers have not fully embraced on-line technology: • Upfront capital investment • Do not want issuers to have access to investors • Direct sales force required for placements • ABS collateral reporting not standardized and infrequent (may be quarterly) • Banking regulations may soon increase asset issuance costs (Basel) • Limited on-line ABS / ABCP software options • Dealers, as bundled financial-service providers, pressure counter-parties in competitive market CONFIDENTIAL

7. Commercial Idea:Set up an ENE Brokerage SPV to create a more efficient & open ABS market Investors To be determined Issuers Equity participants, initially • ABS SPV Created • Use ENE EOL technology • Use Comm Logic services • Broker deals, not a mkt maker ENW Majority Equity Position SPV Minority Equity Participants (for example) Other CONFIDENTIAL

8. What are benefits to the parties? • Dealer • Increased liquidity • Diversified pool of issuers and investors • Potential to write “backstop” options for ABS liquidity • Retain revenue streams from structuring, underwriting, research, trading • Repurpose marketing and originating staffs (expense cut) • Access the Internet without internal development costs • Investor • Investment base broadens • Internet-based market facilitates selling out / down ABS / ABCP positions Issuer • Open Internet-based market allows issuer to lower-cost-of-funding by having market price offering (by lifting the offer) • Allows issuer’s product (ABS & ABCP) to be accessed by more funding sources CONFIDENTIAL

9. Rewards / Risks to Enron • Rewards: • Expected $84mm annual revenue in ABS & ABCP market (ENE 100% owned) • ABCP $60B traded daily, ENE gains 2.5% of market • ENE receives 2.5 bps fee per transaction • Market views as expanding ENE’s core competency • Market needs this now • Long-term cash flow / market creator • Creates transparency / liquidity in financial market • Option of linking asset providing cash flow and other commodities • Risks: • ENE’s banking relationships may view as a threat • Structure may prove difficult to administer • Economic / credit markets tightening (recession worries) • Lack of current / viable financial data (slows secondary market) CONFIDENTIAL

10. Next Steps • Gain internal support • Test idea to issuers (specifically excluding ENE's Tier 1 and 2 banks): • Bank One • GECC • GMAC • Siemens • Technical requirements determination when repurposing EOL • Understand rating agency and SEC requirements • Develop investor base CONFIDENTIAL

11. APPENDIX CONFIDENTIAL

12. Jan 2001 ABS Placements • Credit Card Securizations: • MBNA: • Approximate 80% securitization of loans ($88B total) • $1.25B placed, well-oversubscribed, priced at par • 2 classes, floating rate • 5 yr term priced at 15bps above LIBOR • Lead bank: Deutsche Bank & Merrill Lynch, co-managed by CSFB, Lehman, JP Morgan and Salomon Smith • Bank One: • Places $2.0B, • 5 yr term, with 6.53% yield • First USA places $750M asset-backed paper: • 5.86% yield, AAA-rated First USA CONFIDENTIAL

13. Jan 2001 ABS Placements (cont’d) • Other • Public Service Enterprise Group places $2.5B Stranded cost bonds (“rate reduction bonds”) • AAA rated deal, 7 fixed-rate tranches and 1 variable rate tranches • Shorter-dated notes 2 to 3 X oversubscribed • 120 participants • Household places $660M car loan securitization CONFIDENTIAL

14. Term Securitization • Single originator sells a specified receivable pool into a special purpose entity (SPE) • Issue asset backed bonds to fund the purchase • Beneficial to a bank, that will issue the securities and buy the collateral • Grantor trust good for auto and equipment loans; having long amortization periods • Revolving trust structures used for short-lived collateral such as credit card or trade receivables • Phase 1 (revolving phase): receivable cash flow net of interest and other expenses purchases new receivables • Phase 2 (payout or amortization period): net collected cash flow is used to retire debt CONFIDENTIAL

15. Conduit Securitization • Special purpose corporation that regularly buys interests in pools of financial assets from one or more sellers • Issue commercial paper to fund purchases • Multi-seller operations dominate asset backed conduit market • Most are sponsored and administered by commercial banks • Sellers are generally bank customers • Generally require interest rate hedge in place • 2 layers of credit enhancement • Seller level enhancement, offsets asset delinquency and default • Program level credit enhancement from 3rd party such as insurance company surety bond or letter of credit CONFIDENTIAL

16. MSABCP Structure - Targets Sale of Asset SPE Wholly owned, bankruptcy remote, Sub of Seller Not a taxable transfer MSABCP Structure Eliminates: Rating Agency Fees, Prospectus needs, SEC registration, and Underwriters’ fees Seller Funding Proceeds • May include: • Dell Computer • Bank One • Citibank • GECC • May Dept Stores Rec. Int & SPE Credit enhancement Funding Proceeds P&I Pmts Liquidity Support Program Level Credit Enhanc. MSABCP (“SPC”) Enron owned with minority ptrs such as Bank One and Citibank Liquidity Enhancer Seller Credit Enhancer Fee Fee Rec. Int & SPE Credit enhancement Comm’l Paper (May Req Int Rate Hedge) Funding Proceeds (“Cash”) • Com’l Banks • Insurance Co’s • Com’l Banks • Insurance Co’s Investors Insurance Co’s, Pension Funds, Com’l Banks Institutional Investors, Euro Instit. Investors CONFIDENTIAL

17. Commercial Idea: Become an EOL software vendor (aka GM oppt’y) • Sell Enron’s software to dealers or major enterprises as a financial exchange tool • Enron Benefits: • Short-term (“immediate”) cash flow to ENE • Not ruffle the waters with ENE’s banks (banking relationships) • Market needs this now • ENE’s software products available now • Software sales and implementation skills available now • Enron Costs: • Current software configuration may not meet market requirements • Not a long-term cash flow stream (one-time event) • Market may view negatively (ENE selling its core competency) • On-going software licensing development requirements • Customer support • Software updates CONFIDENTIAL