Trouble in Williams Companies Inc - Essay Example

Williams 2002 Case Tough decisions are required during tough times Trouble in Williams Williams Companies Inc is a company which is based in Tulsa and operates in the energy industry like the exploration and production of energy trading, pipelines and telecommunications. Williams Companies Inc was in trouble in 2002 as it experienced a financial distress as a result of changes in the market conditions and the large debts from Williams Communications Group which is one of its subsidiaries. Financial distress is a condition in which a company has difficulties or is unable to pay for its financial obligations to its creditors. Reasons for the trouble The trouble in Williams Companies Inc was as a result of the collapse in its telecommunications business, ongoing inquires from regulators about its reporting and the softness in the energy market led to financial distress in the Williams. The collapse of Enron in the late 2000 and in the early 2001 was a problem to Williams. This led to uncertainty in the future of energy trading as participants assessed their exposure to Enron. As a result, it competitors like El Paso Corp. announced its intention to curtail investment in energy and concentrate in natural gas. Another rival Reliant resource also decided to scale down its energy trading. The businesses then become very difficult making Williams to record a loss, its first loss in a period of three years. The news about all the problems facing Enron Corporations broadband unit as well as Global Crossing highly exposed substantial weaknesses in the telecom industry and this made Williams Communication Group to be unable to meet its covenants which then led to breach of its lending agreements with its creditors making William Companies financially distressed. Proposed $900 million funding agreement As way to save its situation, Williams Companies Inc proposed a $900 million agreement with Lehman-Berkshire Hathaway which would fund the company and the agreement would be backed by the assets of Barrett Resources Corporation, a company which the Williams had acquired in 2001. The conditions provided for in this agreement were too strict and too onerous for Williams considering the fact that the company was going through tough financial times. The terms required Lehman Brothers would each advance Williams $ 450 million for a period of one year. The terms also required Williams to make a number of payments which included interest rate of 5.8% payable in quarterly basis, the principal amount in one year and an additional payment of 14% of the principal to be paid in cash upon maturity. The proposition would be very helpful to Williams as it would restore liquidity in the company and also increase cash flow but the problem was how to finance it given the financial hard times faced by the company. The loan from Lehman Brother will be guaranteed by William Companies and all of its subsidiaries indicating that the company may lose everything if it is deemed unable to pay for the loan. As a result, the Williams felt a sense of fear that if all does not work out well, they might end up being bankrupt hence losing the company and its subsidiaries to Lehman-Berkshire Hathaway. From the perception of Lehman Hathaway, the proposition would be a good deal for Williams as it will help the company to restore liquidity. According to Lehman Brothers, the terms may not be of much importance for as long as the situation is well taken care of. The purpose of each item in the proposition The purpose of each of the terms of the Proposed Short term credit agreement was to ensure that Williams eventually paid for the loan acquired. Considering the fact that Williams was almost bankrupt, there was the need for Lehman Berkshire Hathaway to restrict Williams in so many ways to ensure that the company tried as much as possible to gain from the loan in order to repay the loan without having to sell its assets. The main purpose of having William Companies guaranteed by the company and its subsidiaries is to ensure that Lehman Brothers odes not suffer losses incase Williams is unable to pay for the full accumulated loan amount. If Williams becomes unable to pay, the company assets and those of its subsidiaries will be liquidated. This proposal is therefore quite expensive for Williams given that the company would be exposed to low bond yield of 7 5/8% debts which was issued in 1999 and would mature in 2019 and would also lead to low credit ratings. William Company does also stand to lose if the loan does not help in restoring liquidity which will enable it to pay off its loan. Analysis of the of Williams’ sources and uses of funds During the first half of 2002, Williams Company recorded an increase in the bond yield and credit ratings. This was also accompanied by a reduction in debt from the use of the loan from the Lehman Brothers as well as increase in cash flow. This numbers are expected to increase during the second half of the year as the company debts will have reduced and the company will also stand higher chances of being able to secure an $800 million credit facility to improve on its financial performance. In the second half of the 2002 financial year, the company’s short term and long term debts will have come to maturity and required to be financed. Accepting the Lehman proposal will enable the company to cater for its obligations hence reduction in its total debts. Recommendations As a CEO of Williams, I would recommend the company to accept the proposed $900 million financing offer. Though the proposition seems to be quite expensive for Williams, its advantages outweigh the disadvantages. That is, with this loan, Williams will be in a position to increase its liquidity and also reduce it debt levels. The conditions set out in the proposal may seem tough for the William Company but are quite helpful as it will enable the company to maintain a fixed interest coverage ratio and a fixed charge coverage ratio. With the terms of the proposal, William Company will have to maintain parent liquidity of at least $600 million, any default in respect to the parent liquidity will be punitive for the company. Lehman Brothers have been the financial advisors for Williams and the terms given in their proposal will be more helpful to the company in ensuring that the company caters for all its financial obligations to its investors. Work Cited Williams, 2002, Tough Times Require tough decisions. http://webcache.googleusercontent.com/search?q=cache:vYyuxzAKhi4J:www.coursehero.com/load_question_attachment.php?q_att_id%3D147402+Evaluate+the+terms+of+the+proposed+$900+million+financing+inWilliams+Companies+Inc&hl=en&gl=ke. Accessed on 1 May, 2012 Read More