Williams, 2002 Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Problem Identification

Williams faces various financial problems due to his previous decisions.It is expected to generate cash through different means in order to address the problem.Lehman-Berkshire Hathaway offered$ 900 million loan to William with a one year time period at a very high interest rate. Lehman also imposed certain debt covenants, which Williams has to follow if he accepts the offer. Therefore,Williams is considering whether to accept the offer or not.

Analysis

Proposed Financing Evalution

Lehman-Berkshire Hath away offered $900 million secured loan to Williams for the time period of one year. In addition to paying back original amount, Williams is expected to make a number of payments like 5.8% interest, additional payment of 14%on principal amount and deferred setup fee, which is supposed to be 15%.

In addition to these payments, Williams is expected to follow the debt covenants imposed by the Lehman-Berkshire Hathaway. It is expected that Williams will maintain the interest coverage ratio and fixed charge ratio of at least1.5 to 1 and 1.15 to 1 respectively. It is also expected that Williams’ capital expenditure will not exceed from$300 million.

The reason behind these covenants could be the lowest rating of Williams. By imposing these covenants, Lehman-Berkshire Hathaway could reduce its default risk. The current interest coverage ratio and fixed charge ratio of Reprehensibility healthy and it is expected to reduce the working capital expenditure of $300 millions also so that it would not be a problem for Williams to accept these terms. By accepting these covenants, it is expected that Williams will raise cash at low interest rate.

In this transaction, the return to investors could be calculated by discounting all cash flows on a suitable discount rate. There is no discount rate given, how ever by calculating the average interest rate that Lehman-Berkshire Hath away receives on loan, which is expected to be 18 %, it can be used as a discount rate in calculating investors return.The calculated NPV for investor in the transaction is $114.41 million.

Purpose of Terms of the Proposed Financing

The loan amount is guaranteed against the capital stock and assets of RMT, which Williams acquired in 2001 by paying $2.8 billion. The purpose behind this is to secure the debt or to reduce the default risk.Lehman-Berkshire Hathaway imposed certain covenants upon Williams like interest coverage ratio and fixed charge coverage ratio should not beg reater than 1.5 and 1.15 respectively.

It is also expected that Williams will not spend more than $ 300 millions on capital expenditure and will give attendance rights to Lehman-Berkshire Hathaway in all its board of directors meetings. It will limit Williams’ intre company indebtedness and will also impose limits to maintain parent liquidity up to 750 million.These all terms imposed by Lehman-Berkshire Hathaway on Williams could be due to its poor credit rating. Investing in a low credit rating company is always a risk of failing to receive the required amount of interest and principal.

It is expected to impose a limit on parent liquidity to maintain at least up to 750 millions , by maintaining this limit there will be low risk of Williams’ liquidation. Attaining attendance rights in all boards of directors meeting is a smart move and it will help Lehman-Berkshire Hathaway in keeping a close eye on Williams all current and future moves.

Analysis of Williams’ uses of funds and problems

Williams has been facing the problem of low cash and increasing debt and it fails to meet certain covenants imposed by its secured creditors. Due to these problems, the credit rating agencies downgraded its unsecured debt rating and corporate credit rating.Downgrading the rating reduces the ability of Williams to participate in trading and energy marketing business.Williams, 2002 Case Solution

As the result of these problems, its share price fell by 90 % to $2.95. Williams addressed this problem by certain means such as converting $975 millions promissory notes to 24.3 million newly issued shares to strengthen its balance sheet.Williams sold its assets amounts to$ 1.7 billion by the end of May 2002 and it is expecting to generate further $1.75 through selling its assets by the end of 2002.

It is also expected to reduce its capital expenditures by $1 billion. In order to generate $1 billion Willaims issued convertible notes with a nominal term of 5 years at 9 % interest per year.This was used by Williams till the first half of 2002 and is expected to reduce its dividend from 20 cents to 1 centsin order to generate further $95 million in the third quarter of 2002.As a part of its planning to generate cash,Williams is aiming to generate $2.2 billion and for this purpose, Williams is looking for a joint venture partner in its business........................

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