Williams Case

Williams Companies 2002 Case

FIN 633 – Eliot Javdan

1) Evaluate the terms of the proposed $900 million financing from the perspective of both parties. How would you calculate the return to investors in the transaction? Steven Malcolm was appointed the CEO of Williams Companies in January 2002 to take charge of the problem at hand at Williams. The company was facing liquidity crisis and amidst the anxiety in the energy markets and the losses of its subsidiary Williams Communication group, its credit ratings had tanked and was unable to find a ready lender. Berkshire Hathaway and Lehman brothers had proposed a short term financing option of $900 million for one year with strings attached as laid in the terms and covenants. The two parties that are concerned here are Williams Companies as debtors and Berkshire, Lehman et al as lenders or creditors. From the perspective of lenders, it was an intelligent strategy to provide short term financing to Williams when none was available with perks and rewards if Williams defaulted or breached any of its covenants. The potential reward of the RMT assets of $2.8 billion dollars was definitely much more coveted than the potential interest payments from Williams. Warren Buffet who was shopping in the crisis struck energy markets for troubled assets had found one in Williams if things went sour for this troubled company. So making available $900 million dollars as short term liquidity for Williams for sweet returns of almost $315 million in interest payments or the big jackpot of the RMT assets of $2.8 billion was no brainer, in fact it was meticulously carved out to take advantage of the situation. From the perspective of the borrower that is Williams Companies, Malcolm was in a very tight spot to make the decision regarding this proposed offer of $ 900 million loan. The payments required from Williams are shown below: Lender - Berkshire, Lehman et al Required Payments Cash interest @ 5.8 % Additional interest 14% per annum...