1. In July 2002, Williams faces a tough time.Williams engaged in many different types of energy activities, including the purchase, sale, transportation, transmission of energy-traded commodities (natural gas and liquids, crude oil, refined products, and electricity), and exploration and refining. It also involved in the telecommunications service by running optical fiber throug old natural gas pipelines.
The company grew impressively from its beginnings. For instance, it posted high profits between 1998 and early 2001, and as late as January 2001. The net income grew from $140 million in 1998 to $835 million in 2001. Williams predicted that its marketing and trading subsidiary would generate a minimum of $500 million in profits “under most market conditions”.
However, Williams’s problems began soon after the spinoff of the communication group, WCG. Because of the collapse of its telecommunications business, softness in the energy markets and ongoing inquiries from regulators about its reporting and energy trading had put Williams under financial stress. Over the first six months in 2002, Williams had cut back on capital spending, planned more than a billion dollars worth of asset sales, slashed the firm’s dividend by 95% and raised financing in a variety of forms.
Williams’ priority was acknowledged to be “raising cash and access to cash”. In the summer of 2002, Malcolm, CEO of Williams, was considering the latest in a series of decisions facing the beleaguered firm: whether to accept a secured credit agreement from Lehman Brothers and Berkshire Hathaway. The new agreement would provide Williams with funding of $900 million for one year. This one-year funding was backed by the assets of the former Barrett Resources Corporation and was subject to a number of conditions. But the financing was not cheap. Malcolm pondered whether it was worth it.
2. If William honors the deal but not sell RMT Buffett/Lehman will earn: – Interest payment quarterly at the Eurodollar rate plus 4% per annum, or about 5.8%; additional interest of 14% per annum accrued and added to the principal balance and paid in cash until maturity; deferred setup fee equal to 15% of the loan amt.
Worse case is RMT go into default. Williams have to, within two days, retain Lehman Brothers to sell RMT, with such a sale to be completed within 75 days. The return of the sale will be used to cover the debt and the rest of the debt (if any) is guaranteed by Williams, Williams Production Holdings LLC and certain RMT subsidiaries.
3. If RMT’s assets are not sold by the maturity date, deferred setup fee worth 15% of the loan amount. If RMT’s asset are sold, the fee would be the larger of 15% of the loan amount or 15%-21% of the purchase price less the indebtedness of RMT. (The percentage begins at 15% and steps by 1% each 60 days to a max of 21%)
4. The loan is not just a loan, it will be benefits by sales of asset under RMT, it is more likely to be an investment but is being secured and guaranteed.
5. a) The loan is guaranteed by Williams Companies as well as by certain subsidiaries, such that if the borrower, RMT goes into default, all the guarantors would have to take up the obligation to repay the debt. b) The loan is secured by RMT’s assets such that if RMT go into default, those assets have to be sold and repay the debt. c) To ensure William’s interest payment to be as low as possible such that it is still able to repay the debt if RMT go into default.
d) The debt is backed by the capital stock is one of the secured asset, so Williams can’t sell it. e) Buffet/Lehman expects most of the asset under RMT will be sold by maturity and they will be benefits by the sales of the assets which is part of the capex which should not be limited. f) Such that RMT and other guarantors can’t transfer the asset out to other intercompany to avoid taking the obligation of debt repayment in case RMT went default. g) Such that the parent would be able to repay the debt if RMT run default.
6. Current yield on B-rated bonds =14%Current yield on Williams’ traded debt = 18%The current yield on William’s traded debt should be more relevant.
7. Buffet is targeting the energy segment because the segment is under-valued at that time because stocks are compromised by collapse of Internet bubble, and the credit-crunched energy companies needed cash and he could probably buy the assets at low prices and hold them until they pay off. Buffet’s strength include he has knowledge on this segment as he started acquiring energy assets in 2000 when he took a controlling stake in MidAmerican Energy.
Also, Berkshire Hathaway is in a good financial position where the cash and equivalents increased from 1999, the company does not need to worry about liquidity and can buy some under-valued stock and wait for a long time, like 5 to 10 years, to let the price of stock increase. He is announcing his intentions to the world so that credit-crunched companies can know there is a ready buyer in the market and because of his reputation and success in the past. Other investors may follow to help him push up the stock price after Buffet had purchased the stocks.
8. Williams was in need of new financing and it also hoped to find a joint venture partner in the business. Since it has all the fundamentals in place – solid assets, strong demand for its products and a reputation for excellent customer service, this can provide added value for MidAmerican Energy.
9. Since 2001, Moody’s and S&P’s have downgraded the credit rating on Williams bonds three times. From Exhibit 3, we can see Williams has experienced a net loss since year 2001. Also, current assets are less than current liabilities from 2000 onwards, indicating quick ratios smaller than 1.
In the year to date June 30, 2002, the equity market value has dropped significantly from 13,142 to 1,524. These show that Williams is in financial distress. Williams is trying to avoid the premium charged on top of the debt as they have a lower credit rating because of the financial distress. Besides, Williams tries to avoid the decrease of stock price.
10. The deal is another step to restoring liquidity at Williams although the financing is not cheap. After the aggressive program of asset sales, Williams still has to repay some debts and improve its liquidity standing at the same time. Since it’s not easy to seek for external financing given their current financial position and credit ratings, this deal can be one of the few options. It would be difficult for Williams to secure a loan deal if they don’t take this deal, and thus they would have a smaller chance to produce current cash flow and improve both the short- and long-term financial positions.