Funny, Missa Davis never bothered to update her prematurely accusatory article on WMB, the one about the C dealings causing "worry" (for the bitter laughingstock fund manager from Tulsa).
There was a great article from Dow Jones that shows the canny moves in their subtlety and their positive implications. That article is an example of real reportage and not the half-baked hearsay and crude assumptions of Missa Davis the amateur Omorosa wannabee.
Williams Cos Frees Up Cash By Tapping Citi For Note Sale
By LIZ RAPPAPORT April�20,�2004�7:30�a.m.
Of DOW JONES NEWSWIRES
NEW YORK -- Williams Cos. (WMB) has done it again - freed up cash without adding any debt to its balance sheet. The Tulsa, Okla.-based energy company tapped Citigroup again last week to sell another $100 million in notes linked to Williams' credit to institutional investors in the high-yield bond market.
As with Citigroup's sale in early April of $400 million of notes linked to Williams Cos. credit, the proceeds from the sale of the bonds will be used to fund a trust in Williams' name which backs a letter of credit that Citigroup has provided to Williams Cos. Williams must retain at least $400 million in cash-collateralized letters of credit as a hedge for its future sales of natural gas.
Because that cash posting now comes from bond investors, Williams can use the previously "trapped" cash to pay down debt, which is what it plans to do. To boot, it doesn't have to log the $400 million as debt on its balance sheet.
"This provides for an opportunity to not use up capital for contingent liabilities," said Kelly Swan, spokesman for Williams Cos.
The company must retain the letters of credit to hedge its future sales because its customers demand them. In other words, a buyer of a future contract for natural gas from Williams at a certain price now must be reassured via a letter of credit that Williams will be able to deliver that gas in the future, even if the price of gas goes up or if other factors forced the company to go out and purchase the gas to deliver to the customer.
"Net, net, it is a lower-cost refinancing," said Jeffrey Wolinsky, director of utilities, energy and project finance ratings at Standard & Poor's.
Williams' interest expense for the fixed-rate credit-linked notes, if it doesn't draw down on the letter of credit, is 3.18%, said people familiar with the offering. This is much less than it would have to pay in interest if it had sold straight bonds into the market, and it is tax deductible.
Also, the credit-linked notes create an unsecured claim against the company in its capital structure, a key factor for Williams in choosing this type of transaction, said Swan. A 3.18% unsecured claim is inexpensive financing for a single-B-plus-rated company. Straight bonds from such risky companies can create interest expenses at least twice as high. "For a company to go out into the bank markets and get an unsecured credit line, you have to be investment-grade," said Swan.
Williams currently has $11.2 billion of outstanding debt, and it doesn't want to add any more, he said. And while a bond or even a syndicated loan would be added to its total debt load, this way, Williams may pay down debt, aiding its aim to "display investment-grade characteristics by late 2005 or early 2006," he said.
Another positive in the deal for Williams is that it won't have to renegotiate the terms of its letters of credit with Citigroup every year, which most companies must do, said a person familiar with the deal. The letter of credit stands at the same terms for the length of the bond's life - five years.
Williams Cos. 3.18% rate is less than the coupon payment on the credit-linked bonds because Citigroup fills in the difference with proceeds from its purchase of certificates of deposit for each tranche. The $400 million notes mature in five years and were sold with a yield of 6.75%. The flating rate notes also mature in five years and were sold with a coupon at London interbank offered rate plus 3.25 percentage points.
While some market observers have noted that there could be and have been disclosure problems with a bank syndicating its lending risk into the bond market, this deal was different, said parties involved. Williams Cos was involved in the marketing of these bonds to the bondholders, as opposed to a bank simply taking a position in a company and selling the risk separately and apart from the company's motives, said a source familiar with the deal.
"For Williams this makes economic sense," said S&P's Wolinsky. "If there is a rational reason for using them (this type of transaction), it is no problem. If the sole purpose is to hide debt off the balance sheet, that is a problem."
Whether or not Williams' strategy brings the company closer to its coveted investment-grade status is questionable. S&P counts the letter of credit as debt regardless of its absence from the balance sheet, said Wolinsky.