Contents 1) Evaluate Evaluate the terms terms of of the propos proposed ed $900 $900 million million financing financing from the the perspecti perspective ve of both parties. How would you calculate the return to investors investors in this transaction? f you need more information! what information do you need? ...................................................................2 "#) hat is the purpose of each of the terms of the proposed financing ..................................3 "%) &onduct an analysis of illiams' sources and uses of funds during the first half of #00#. How do you e(pect these numbers to evolve over the second half of #00#? hat is the problem facing illiams? How did it get into this situation? How has it tried to address the problem it is facing? . .3 ")*ome might describe illiams as +financially distressed., hat evidence is there that illiams' business may be compromised co mpromised as a result of its previous financial decisions? ..............5 "-) +ough times demand tough decisions., /s the &E of illiams! would you recommend accepting the proposed $900 million financing offer? f not! what alternatives would you pursue? . 6
PERCENTAGE PERCENTAGE CONTRIBUTION CONTRI BUTION
Roll Number !n"it #umar R Ga&at'ri 'ra**'a 'ri"'an*e urb'i #ot'ari an*ee, -'at
Name(PGP/17/) 1$ 5 22 2+ 0 2+ 2$ 0
Percentae Contribution 20% 20% 20% 20% 20%
1) Eval Evaluate uate the terms terms of the proposed proposed $900 million million financing financing from from the perspecti perspective ve of both parties. How would you calculate the return to investors in this transaction? f you need more information! what information do you need?
Evaluation from er2shire Hathaway and 3ehmann rother's 4erspective •
illiams was 2nown for its solid assets! strong demand for its products and a
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reputation for e(cellent service. ts mar2et value for E5uity as compared to its competitors was as follows6
he illiams &ompanies 1%!1-# •
7ynegy :!10-
7ominion 8esources 1-!;9#
urphy il %!<0<
he increase in revenue was by $1. billion despite the economic downturn due to higher gas and electric power trading margins! higher natural gas
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revenues and higher natural gas sales prices he company showed long term potentials due to its strong assets he loan was secured by a collateral in the form of arrett 8esources &orporation which would ma2e up for a default in the worst case scenario
Evaluation from the perspective of illiams •
eing under e(treme financial stress! this was deal would give illiams a greater
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chance to secure a credit facility of $;00 million he financing was not cheap and re5uired payment of principal plus = per annum
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cash interest and a deferred set up fee. he deal would also re5uire maintaining a ratio of 1.- to 1 interest coverage and fi(ed
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charge coverage ratio t would limit capital e(penditures in e(cess of $%00million and a maintenance of
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li5uidity of at least $:00 million up to $ ;-0 million However accepting the deal would help restore li5uidity
8eturn to nvestment he return to investment in this case would be the interest of -.<= per annum plus 1-= of deferred set up fee. However this would change depending upon the sale of 8's assets. Hence information about the probability of sale of 8's assets and the gains from it are re5uired
"#) hat is the purpose of each of the terms of the proposed financing
he covenants providing floor values for interest &overage ratios and fi(ed charge coverage rati ratio o help helpss in main mainte tena nanc ncee of illia lliams ms'' abil abilit ity y in meet meetin ing g the the fina financ ncin ing g e(pe e(pens nses es satisfactorily and would prevent any further downgrade from credit rating companies which would ma2e refinancing and restructuring e(pensive. *ince lenders 3ehman rothers and er2shire Hathaway due to heavy investment by the lenders in illiam's directly and via other companies! hence certain restricted payments on e5uity is re5uired to maintain the value of investments. t also contributes to restriction in capital outflow from the company. *imilar purpose is served s erved by the restriction on capital e(penditure. /ccess to all board meetings and other meetings of the committee will help ensure that the decisions ta2en are favourable to shareholders and agency problem is reduced. he covenant on the re5uirement of li5uidity indicates preservation of ability to meet the maturing short term and long term debt and wor2ing wor2ing capital capital re5uirem re5uirement ents. s. 7efault 7efault provisio provisions ns are always always re5uire re5uired d to ma2e ma2e sure the amount invested is recovered fully. "%) &onduct an analysis of illiams' source sourcess and uses of funds during the first half of #00#. How do you e(pect these numbers to evolve over the second half of #00#? hat is the problem facing illiams? illiams? How did it get into this situation? How has it tried to addresss the problem it is facing? addres easons for financial distress and problems illiams is facing
a) rite>off of investment in & 7uring the ech ubble! the whole telecom mar2et that & was involved in suffered a lot of problems due mainly to a large oversupply! as indicated by an estimated #= to -= of the fiber> optic lines which were only carrying traffic. he revenue of & eventually plummeted! wherein prices of the lines decreased by b y more than 90= from 199< and #00#. #00 #. n @uly #00#! the telecommunications sector was e(periencing a lot of problems. & itself also began to e(perience a lot of financial stress! and in hopes of supporting it! illiams converted notes to shares! providing +credit support, of $1. billion of &'s debt Awhich illiams listed as an off>balance sheet item). n the end! illiams too2 a one>time accounting charge of $1.% billion of guarantees and payment obligations. he problems with & ended up affecting illiams as well! causing illiams' net income after e(traordinary items to plummet. b) Bnforeseeable mar2et mar2e t conditions for energy trading trad ing
ecause of the collapse of Enron! the mar2et condition for energy trading became very unclear. his led to most competitors in the industry choosing to switch focus or scale bac2. n addition! illiams Energy ar2eting and rading also e(perienced its first loss in % years. illiams was suffering from deteriorating credit ratings and increasing yields! and it provided a huge ris2 on the company's ability to participate in the mar2et and raise funds. c) ngoing in5uiries from regulators about reporting and energy trading illiams was also facing an nvestigation by the *E& concerning the collapse of & and its financial reporting. his further worsened the situation. illiams had a receivable of $ #.1- billion from &. t had an obligation on $1. billion worth of & rust Cotes and paid $;- million for the & lease agreement. urdened with $%:% million of previous receivable! &'s debt burden was already high to raise new funds from the mar2et. *ome operations that it is running are sapping money from the rest of the company and even had to sell off illiams &ommunication group. &redit has dried up and there is a lac2 of investment in the energy sector because of recent problems in the energy company Awith companies including Enron). here is also a +curve shift, and the write off of certain assets is definitely not helping the situation. illiam's was also reeling from &'s debt burden. t got into this situation because of problems in its asset>based businesses and the energy mar2et as a whole. *easures to address the problem and +ources and uses of funds in #00#
Dor the turnaround of the company! illiams had a four pronged plan. his would be plan to sell assets! reaching a resolution for energy and trading boo2! managing and monitoring cash businesses and righ>siing rig h>siing illiams planned to sell $#-0 million to $;-0 $; -0 million in assets during #00#. However it had sold $1.; billion in assets and announced intention to sell an additional $1.- to $% billion over ne(t 1# months. &ape( spending was planned to slash by #-=! a saving of $1 billion. illiams planned to issue e5uity lin2ed security DE3CE 4/&*! illiams would be obliged to pay 9= per annum in 5uarterly payments. illiams sold preferred stoc2 to er2shire Hathaway. /nother would be to revive the mar2eting mar2etin g and trading division to be worth $#.# billion. illiams would cut its dividends by 9-= which would save the company $9-million. illiams had a $#.# billion commercial paper program that was bac2 by a short term credit cred it facility. f +tatus "uo! numbers evolving in second half of #00#
Drom the e(hibits! we can see that $%;<. million of commercial paper was outstanding. illiams inventories increased by appro(imately 100 million! from $<1% million to $90< million. Earnings per share AE4*) dropped from .;; to .10. nvesting income dropped from $% million to $1:.1. f we analyse the &D of the company! we find that these numbers would worsen if status 5uo condition is maintained. illiams is facing a li5uidity crisis and until investor confidence doesn't return! illiams would continue remaining in financial distress. ",)+ome might describe illiams as -financially distressed. hat evidence is there that illiams' business business may be compro compromised mised as a result of its previous financial decisions?
Fes! illiams is in financial distress. his condition as e(plained in previous answer is due to previous financial financia l decisions. n #00#! due du e to failure in realiation realiatio n of due from &! it incurred an estimated loss of $#%# million. /nother decision would be of illiams to ma2e payments of guarantees guarante es to & of $;-%.9 million. /nother decision would be usage of more cash in first 5uarter of #00# compared to #001! an increase in $;91 million. ith plummeting stoc2 price due to loss of investor confidence! illiams ended in financial distress. n addition! illiams had preferred interest and debt obligations that had provisions re5uiring accelerated payment of the obligation of the assets in the event of specified levels of declines in illiams' credit ratings. illiam's rating was li2ely to fall due to its financial problems. f its credit rating did in fact decline below investment grade! its ability to continue in energy mar2eting and trading activity would be significantly limited. n ay #00# illiams faced further trouble when oody's nvestor *ervices notified it that it would be reviewing illiams to determine if a credit rating downgrade should be initiated. Hence! analying the above e(planation and that given in previous "uestion! we find sufficient evidence to claim that illiams business maybe compromised as a result of its previous decisions.
"/) -ough times demand tough decisions. s the &E2 of illiams! would you recommend recommen d accepting the proposed $900 million financing offer? f not! what alternatives would you pursue?
/s a group! we recommend accepting the proposed $900 million financing offer. illiams was in the need of new financing and it had substantial amounts of short>term and long>term long>term debt maturing in the second half of #00# and its credit and paper facilities facilities Aheld in reserve to
raise additional short term financing) needed to be renewed later in the year. hough the terms of the loan were rigorous! illiams should e(plore other options in future using er2shire's er2shire's $900 million financing as an e(ampleGleverage e(ampleGleverage that their balance sheet would be strong in 10>#0 years. his would ma2e other credit companies wonder if uffett is putting up this money! why shouldn't they. uffett is 2nown to target companies he believes are undervalued and has s2ills in 2nowing when companies are not being given their fair credit. n the flip side! 3ehman's and er2shires bid is no guarantee. Durthermore! illiams would have to pay -.<= interest 5uarterly! a 1= principal payment at maturity! and a +deferred setup fee, of at least 1-=. /lso! /lso! it would be important important for illiams illiams to sell the arrett assets or the fee would drastically increase. oreover! illiams would most li2ely be unable to find a oint venture partner in its Energy ar2eting and rading division. n the ne(t - years! illiams has over $; billion in debt coming due. /s an alternative approach to financing! illiams could go to regulators for funds contending that its services are vital to the public and also as2 for changes in the industry which would help them survive. E5uity investments from energy development corporations are another option. /n interesting alternative is for illiam's to turn away from an e(cessive reliance on mathematical models to predict the future. here are 5ualitative and udgment issues which these capital models may not address. hese ris2s can only be understood through intuitive means. /lso! there are underlying deficiencies in the financial system's ability to process! view! trade! and analye comple( financial products Aas shown by the recent financial crisis). Dinally! the cost of default and potential ban2ruptcy is far greater than the proposed financing agreement and er2shire and 3ehman. &onsidering that the company has sound fundamentals! it has the possibility to turn around the crisis once demand pic2s up again. herefore! it should accept the offer given desperate circumstances.
