Opinion: Earlier this year Kelly Martin took over the helm of troubled drug manufacturer Elan Corporation. He will need all his skills to keep the group intact.

Elan says it is "fully co-operating" with the investigation by the US regulator - the Securities and Exchange Commission (SEC) - into the company's affairs and that "discussions" between them are taking place. Nevertheless, it is hard not to conclude that these are confrontational.

As widely reported last week, a delay in the publication of its 2002 annual report could lead to a default on its debts. Elan has applied to the SEC to extend the filing date to July 15th. The report was due to be lodged last Monday but has been delayed due to the drawn-out talks with the SEC over Elan's treatment of off-balance sheet items.

This is now being brought to a head. The SEC, in the wake of the Enron spectacle, is particularly vigilant as regulator. While probably heavy-handed, like Homeland Securities' rough treatment of airline passengers, it would be hard to argue with its vigilance. Elan could, of course, argue about the technical interpretation of the accountancy rules. After all, didn't its auditors, KPMG International, sign off the books for 2001? A change in interpretation could lead to a restatement of those accounts, thereby raising their validity.

Mr Martin agrees that the group is over-engineered financially and has been making vigorous attempts to make the right adjustments, as the recent asset sales show.

Its structure includes 55 joint ventures that need to be unwound, two off-balance sheet partnerships (the immediate focus is on these as, under the covenants, holders of these bonds, amounting to $840 million [€728 million], have to be provided with audited accounts for 2002 by July 30th), and $400 million of convertible bonds.

Sorting this out is a Herculean task. Has the new chief executive officer got the metal to sort it all out?

His contract includes a commitment to pay him $5 million if the company is sold this year, and $3 million if it is sold in 2004, and these have led to some speculation that his tenure will be brief. But Elan hotly denies this viewpoint saying such provisions are standard practice for those who try to sort out financially troubled companies.

Interestingly, Elan's busy message board on the internet is full of praise for Mr Martin. One message told his fellow shareholders "I am down $30,000 since mid-JuneI trust Kelly 100 per cent patience is the key."

Mr Martin's record should provide shareholders with some comfort. While he has never before been chief executive of a publicly quoted company, and has had no experience in the drug/pharmaceutical industry, he was acknowledged as a skilled fixer of troubled companies during his 21-year stint with Merrill Lynch, and ended up as head of its international private client division. Importantly, he was not involved in Merrill Lynch's deals with Enron, and was picked to testify for Merrill Lynch in the US Senate hearings on Enron last year.

But Elan, once the State's largest publicly quoted company, will be his biggest challenge so far.

Not only has he to satisfy the SEC's requirements - and I cannot see the regulator turning - but there are others. These include the possible fall-out from the bond holders, which, in the worst scenario, would lead to Elan's effective demise as a publicly quoted group, and disgruntled shareholders who are preparing their class actions against the company.

It is ironic that, if Elan has to restate its accounts leading to charges of hundreds of millions of dollars, it would provide the shareholders with more fodder to beat the company even harder.

So what are the options facing Elan? With the sparse information provided by the company, it is not possible to be definitive. However, while restatements, and write-offs, would scar the accounts, it is worth stressing they would not alter the business. Nor would they affect cash flow, or the net cash.

The company is very liquid; its last accounts displayed net cash (or equivalent) of $1 billion as at March 31st, 2003. That is a good cushion.

The first line of concern is the deadline of July 30th for the audited accounts for 2002. These have to be provided to the holders of bonds, EPIL2 and EPIL3. If that deadline is not met, these holders could demand immediate repayment of their combined debt amounting to $840 million.

Clearly Elan could weather that storm.

But the breaking of that covenant would trigger other breaches, including the loan note of $650 million due in 2008, and a convertible bond of $450 due next December.

That is a different scenario; Elan could not cope with the cumulative impact of a demand to pay off these debts, which would lead to administration or liquidation. Even without these pressures, Elan's financial structure looks quite toppy, but it is in the process of rationalisation under its 18-month recovery plan.

According to the first-quarter results for this year, it reduced its revenue from $446.6 million to $260 million and incurred a net loss of $130.2 million. Its total indebtedness amounted to $3.2 billion, dwarfing shareholders' equity of $711 million. And total assets amounted to $3.9 billion but intangible assets accounted for $1.5 billion of these.

Elan says it is on target with its plan to break even prior to the launch of new products.

If the covenants aren't breached, then the recovery plan goes ahead, but the shareholders' class actions are likely to continue. If the covenants are breached, it would probably be overly optimistic to suggest that an accommodation, suitable to Elan, can be reached with the loan- and bond-holders. Indeed, these holders must be doubly nervous following the decision of credit rating agency, Standard & Poor's, to cut the rating of its debt to "CCC" from "B-" and placing the company on credit watch. If they are true to their natural colours, they are likely to try to consolidate, and even improve, their position.

If it comes to a push by the holders of debt, and if the company is determined to keep it intact rather than allow it to fold, then the price to the shareholders would be very high. They could insist on receiving Elan shares, at a big discount, and end up with virtually all the company.

Clearly the negotiating and management skills of Mr Martin, and his advisers, will be crucial to Elan's future. While at Merrill Lynch he turned around the firm's global debt markets side from losing $1.5 billion in 1998 to a profit of $1 billion in 2001. Elan looks a tougher nut to crack.