Williams Case

Evaluate the terms of the proposed $900 million financing from the perspective of both parties. How would you calculate the return to investors in this transaction? If you need more information, what information do you need?

Williams Company is pressed by circumstances to decide whether to enter into a high-cost loan agreement that will help it solve its imminent liquidity crisis, caused by a series of unfortunate events for the business and a large amount of short-term and long-term debt maturing in the second half of the year. The cost of the loan is extremely high, but, given the disadvantaged situation of the company, might be the only option that will allow the company to stay in business and prevent bankruptcy for its foreseeable liquidity problems.

Williams debt rating had a number of downgrades by rating agency, which combined with the increasing required yields of corporate bonds, is already adding up to a very high cost of debt for the company even on the open debt markets. Moreover, an ongoing crisis on the financial markets is making it almost impossible to find investors willing to lend funds to the already distressed company. The telecommunication subsidiary of Williams recently went bankrupt and one of the major businesses, the energy trading, is in decline.

To sum up, the steeply priced short term loan may be the only option for the company to survive through a very tough moment. The short-term loan will give the company time to improve its structure and ratings. Enhancing the company asset structure and liquidity can make it possible to raise debt at a lower cost by the time the loan matures in one year. Also, more of the company assets can be sold out to both raise capital and reduce maintenance and support costs for its facilities and save from working capital enhancement and operating expenses cuts. However, the high cost of the loan can hamper the ability of the company to make the necessary operational improvements and capital investments that are necessary to improve profitability and increase liquidity. To evaluate that, we need more information on the company investment needs and profitability by business segment. We are also not given sufficient information to evaluate the company capital requirements to sustain and improve competitiveness.

Berkshire Hathaway and Lehman Brothers appear to be able to gain significant