Williams, 2002 Case Study Essay

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Fin. 5312—100 Corporate Finance
Professor Megginson
February 17, 2013


Case 2: Williams, 2002


In 2001, the Tulsa, Oklahoma, Williams Company was in financial distress. The primarily energy-industry company was struggling with a shrinking energy trading market, which was marked by distressed entities such as Enron’s broadband unit and Global Crossing. Williams also suffered internally with a floundering telecommunications division and a plummeting stock price. These issues led credit rating agencies Moody’s and …show more content…

The IRR for this agreement ranges between 11.87% and 13.01%. The return on investment (ROI) for this particular agreement ranges between 52% and 58%. In either case, the numbers range because of provision (c) listed in the case’s Exhibit 1. The “deferred setup fee” fluctuates depending on potential sales of RMT’s assets.
Terms of the proposed financing
Those involved in the lending process establish financing terms to protect the positions of all parties. The debt guarantee in Williams’ proposed financing, for example, provided insurance for the repayment of debt. Williams would essentially act as a co-signer for Williams Production RMT’s obligations to Berkshire Hathaway and Lehman Brothers. Per the terms, Williams would have to agree to make payments in place of Williams Production RMT if any of the payments were late or not paid.
Using a guarantor would allow Williams Production RMT access to a loan at a lower interest rate than if Williams had not secured the loan. The logic behind this is that two individuals or entities promising to pay back the debt means there is lessened risk for overall default. That means Berkshire and Lehman may be willing to accept a lower interest rate in return for less risk of loss. It is quite possible that Williams Production RMT would not have been able to obtain a loan without a guarantee.

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