Williams, 2002 Case Study Essay

Fin. 5312—100 Corporate Fund

Professor Megginson

February seventeen, 2013

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Case 2: Williams, 2002

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Launch

In 2001, the Tulsa, Oklahoma, Williams Company was in financial stress. The mainly energy-industry business was experiencing a downsizing energy trading market, which was marked simply by distressed choices such as Enron's broadband unit and Global Crossing. Williams also suffered internally having a floundering telecommunications division and a plummeting stock value. These issues led credit rating companies Moody's and Standard & Poor's to downgrade the credit rating of Williams' a genuine to the amount of non-investment-grade gunk bonds. Around all of this uncertainness, the company on January twenty one, 2002, announced a new CEO, Steven L. Malcolm. Malcolm realized one of the important functions for Williams moving forward will be raising capital. Malcolm's four-pronged plan to accomplish that goal involved selling possessions, reaching a resolution for its strength and trading book, taking care of and monitoring cash and businesses and " right-sizing” Williams to reflect the new scope of operations. Nevertheless , Williams a new substantial sum of initial and long-term debt maturation in the second half of 2002. In addition , its credit and commercial conventional paper facilities would have to be renewed comparable time. With approximately $450 million us dollars of cash available and only 1 undrawn spinning credit service, Williams searched for external loans to help meet its current cash flow requirements. One selection of investors led by Warren Buffett's Berkshire Hathaway along with Lehman Brothers provided Williams an answer with a one-year $900 , 000, 000 loan. Within the terms of the agreement, each lender would financial loan $450 , 000, 000 to Williams Production RMT, a Williams subsidiary, whose major property included natural gas properties inside the Rocky Mountain range. In addition to the repayment of the primary in one year, Williams could pay five. 8 percent interest quarterly and yet another 14 percent of the primary at maturity plus a " deferred setup fee. ” The deferred setup fee would be equivalent to the greater of 15 percent of the main or twenty-one percent in the purchase price much less RMT's indebtedness. This would be affected by any further asset liquidation by RMT. The loan, guaranteed by Williams Company and also certain subsidiaries, also included several contrat that Williams must satisfy to avoid infringement of contract. The positive contrat included preserving an interest insurance ratio of more than 1 . five to 1 and maintaining a set charge protection ratio of at least 1 . 15 to 1. Adverse covenants limited restrictive payments (including payoff of capital stock) and capital costs in excess of $300 million. Complete evaluation from the terms and lending scenario reveals this kind of loan might create a effective scenario not only for the lenders, but for the borrower as well. For Williams, the loan provided temporary relief from multiple initial debt security maturations and enhanced you can actually ability to safeguarded a credit facility of $700 mil. This would be followed by beneficial market reactions in the form of increased stock cost as a result of reduced uncertainty of future cash flows. Likewise, any Buffett investments in Williams would signal a strong endorsement of the company's future leads, likely resulting in increases in Williams' share price. Also, for Berkshire Hathaway and Lehman Friends, this deal should supply high results on expenditure. Assuming the loan would be kept to maturity, the lenders might divide earnings of approximately 34% on this bank loan. Given that Williams guaranteed the money, backing this with asset and capital stock, such returns with this risk might be a huge earn for equally lenders. Even though the...

Cited: Coval, Joshua, Robin Greenwood, and Peter Tufano. " Williams, 2002. " Harvard Business School Submitting (2002): 1-17. http://www.hbsp.harvard.edu. Web. 21 Jan. 2013.

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