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Williams Case

DNB Confidential
82610 – Axel Berning
Williams Case
1. Why is Williams considering a $900 million one-year loan from Warren
Buffett and Lehman Brothers?
Williams is under financial pressure largely due to the failure of its telecom business.
In addition, the energy market was also uncertain following the Enron collapse. As
result, Williams was in demand of liquidity and had recently made significant
cutbacks on capital spending and its outspoken priority was “raising cash and access
to cash”.
2. What cash flows will the loan generate assuming interest is paid in cash
quarterly and the loan itself is fully repaid in one year?
The cash flow will generate the below schedule:
cash flows
quarterly payments of interest at 5.8%
interest, to be paid in cash at maturity
"deferred set up fee", provided no
cash flows
3. Calculate the internal rate of return on the loan assuming it is fully repaid in
one year and there is no sale of RMT. (This is known as the loan’s yield-tomaturity, effective annual yield, or simply yield. It is sometimes called the
promised rate of return.) [See Section 6.2 of the textbook for details on IRR]
Using the RATE function in Excel, the IRR was calculated to be 8,2% on a quarterly
basis, i.e. an annual rate of 32,8%.
4. Is repayment of the loan a sure thing?
No, Williams had large amounts of short- and long-term debt, in total some $1211
billion (711+500 Exhibit 7). Williams had however also identified $450 million in
cash in addition to access to a yet undrawn revolving credit of $700 million with a
three-year term. It all comes down to managing the liquidity and getting to realize
the identified savings as well as cutting dividends and capex.
DNB Confidential
82610 – Axel Berning
Is the expected rate of return on a loan higher, lower, or equal to the promised
rate of return?
The expected rate of return is higher (34,7%, the sum of interest rates) than the
promised rate of return (32,8%).
What will happen if Williams cannot repay the loan in one year?
The loan has been guaranteed by Williams Companies as well as certain subsidiaries
as well as secured with the capital stock and assets of RMT, which are the oil and
gas properties of Barrett Resource. Thus, if Williams fail to make payments on the
loan or meet other prespecified conditions, these assets can be forfeited to the
lenders and the Williams Companies, and the subsidiaries, must provide what ever
liquidity they can as well.
5. The loan has a number of covenants and pre-conditions, which are listed in
Exhibit 1. Can you explain what each requires and why the lenders have put
the requirements into the agreement? What happens if a covenant is
Loan and Bond contracts typically contains covenants, restrictive clauses to prevent
and limit the lender/bond issuer to act in a way that may be detrimental to its ability to
repay the loan. In the case of breaching any covenant the bond will default.
Covenants may differ depending of the nature of the loan. In this case, liquidity
control is key which is reflected in the covenants. According to the covenants of the
proposed loan, Williams must:
1. maintain interest coverage ratio of greater than 1.5 to 1 – Williams must
to uphold its ability to meet the required interest payments
2. maintain a fixed charge coverage ratio of at least 1.15 to 1 – Williams
must maintain its ability to pay fixed financing expenses, e.g. leases.
3. Limit certain restricted payments, including redemption of capital stock
of Williams – Williams will be restricted for certain activities, such as
repurchasing of shares or paying out dividend, that may benefit equity
holders on the cost of the bond holders if the company would declare
4. Limit capital expenditures in excess of $300 million (except for capital
expenditures of borrower, RMT) – Williams will not be able to take
capital expenses exceeding $300 million to prevent that fund are tied up
in non-current assets.
5. Give the lenders attendance rights to all of its board of directors’
meetings, as well as any meetings of any committees of the board – the
lender will have complete transparency of discussions and decisions
that may affect William’s ability to meet its obligations.
6. Limit intercompany indebtedness – Williams will not be able to take on
any additional loans in the parent or subsidiaries to increase liquidity
which will have an impact on its ability to repay the loan and lost control
of the lenders loan.
7. Maintain parent liquidity of at least $600 million, stepping up to $750
million over the year. If a default were to occur with respect to parent
DNB Confidential
82610 – Axel Berning
liquidity, Williams would have to, within two days, retain Lehman
Brothers to sell RMT, with such a sale to be completed within 75 days.
Liquidity projections to be provided weekly until the maturity date…. In
the event of a company sale, the loan was required to be prepaid in full.
– Willams will need to maintain a certain level of liquidity to ensure its
ability for repayment. If the liquidity falls below, the lender will sell the
security, RMT, in accordance with the deferred setup fee.
If Williams does violate one of the covenants, they will be in default of the loan which
means that the lenders can accelerate the loan and take control of the collateral
provided to get repaid if Williams does not have the liquidity. Most likely is that if they
breach any covenant, they will be forced to negotiate with the lenders in order for the
lenders not to accelerate the loan. And pay additional fees.
6. As the CEO of Williams, would you recommend accepting the proposed
financing offer? Why or why not?
Williams was under financial stress due to profit drops operations which led to drop in
the credit rating, short- and long-term debts maturing soon in addition to facing SEC
inquiries on its financial reporting. The loan will hopefully provide Williams with
liquidity needed to, hopefully, change the direction of the company and put them in
the direction of a proper turn around. I would recommend accepting the loan given I
was fully committed to the changes needed. However, it is risky as you consent to
substantial undertakings from lenders and if you fail to repay or breach the covenants
you are in discussions with lenders, who might not see the situation as you, in
addition to run the operation as well.