Williams ended a rocky week Friday with two major credit ratings agencies split on how to evaluate its obligations to its spin-off, Williams Communications Group (WCG), and at least five class action lawsuits filed claiming it misrepresented those obligations. Late Friday Moody’s Investors Service confirmed the ratings of the parent company (WMB, Baa2 senior unsecured) and its subsidiaries. Moody’s also confirmed the Baa3 debt rating of Williams Communications Group (WCG) Note Trust, a third-party special purpose vehicle to which Williams has a contingent obligation. In addition Moody’s said the rating outlook for both entities are stable.

Even later Friday, Standard & Poor’s (S&P) placed Williams and subsidiaries on CreditWatch with negative implications, saying it saw “a higher probability” that all or some of the $1.4 billion of senior notes issued by the WCG Note Trust, “will be refinanced with debt rather than equity by Williams, due to a significantly greater than expected deterioration of the asset value of Williams Communications.”

If Williams adds new debt the company “may be challenged further to achieve leverage targets that are more appropriate for the current rating.” S&P said.

S&P also found “uncertainty surrounding the timing and pricing of the sale of substantial assets to shore up the balance sheet,” and noted that “the recent drop in the stock price at least modestly constrains financial flexibility and may trigger “material adverse change” clauses, or similar clauses in bank revolvers and/or commercial paper back-up facilities.”

S&P plans to conduct a thorough bottom-up analysis, by business unit, “to determine whether the current rating is appropriate, given the potentially weakened capital structure, quality of cash flow, and diminished financial flexibility.”

Among the ratings put on watch with negative implications by S&P are Williams corporate rating of BBB+/A-2 and its senior unsecured debt rating of BBB. The individual pipeline ratings of BBB+ also are on watch.

Williams stock had rebounded by 7.47% Friday to close at $19. It had started out the week at just under $25, but dropped precipitously Tuesday when Williams announced it was deferring a full earnings report until it assessed contingent liabilities related to WCG (see Daily GPI, Jan. 30).

The company said Tuesday the delay and its assessment was initiated in light of its “previously announced intention to eliminate credit-rating and equity-price triggers as part of contingent financial commitments associated with the 2001 spin-off of WCG, and because of recent developments within the telecommunications industry.” Within the next few weeks, Williams said it expected to be able to estimate the financial effect, if any, regarding its ultimate obligation related to WCG’s $1.4 billion debt and a network lease agreement covering assets that cost $750 million. Any financial impact would likely be classified as discontinued operations in Williams’ final 2001 consolidated income statement, the company said.

“We believe that Williams has the financial resources and liquidity to perform on its obligations to WCG without impairing its own credit quality,” Moody’s said Friday. The ratings agency said its affirmation came after discussions Thursday with Williams management about its contingent obligations related to the “financially stressed Williams Communications Group (WCG, Caa3 senior unsecured, negative outlook).” Williams has $2.5 billion of various contingent obligations to support WCG, the largest of which is the $1.4 billion of notes issued by the Note Trust. “The possibility of Williams assuming the Note Trust debt in some fashion or repaying it was fully factored into our rating confirmation of WMB debt in December 2001,” Moody’s said.

Further, the agency “is monitoring the progress of WMB’s debt reduction plan that it announced in December. The plan includes placing mandatory convertible securities (a $1.1 billion offering was concluded in January), selling assets, curtailing capital spending by about $1 billion, and eliminating rating triggers (the most significant of which is included in the Note Trust covenants). Moody’s expects that cash raised from these initiatives will be used to maintain debt at levels reasonable for its rating and its business risk (fully adjusted debt-to-capital in the mid-50% range, retained cash flow-to-debt approaching 20%) as well as for capital expenditures. We expect WMB to adjust spending levels in line with its internal cash flows and proceeds received from asset sales.”

Moody’s said Williams has “ample liquidity” and ” maintains lines that can well accommodate the substantial and volatile working capital needs of its energy trading business. It also draws financial flexibility in its ability to reduce spending when necessary, since its mandatory capital expenditures are relatively low.”

Moody’s said it will carefully monitor the execution of WMB’s plan in the coming months.

Meanwhile, Williams action in deferring a complete earnings report Tuesday spawned a rash of class action lawsuits from various law firms seeking to represent investors. Law firms in Arkansas, Connecticut and Pennsylvania and New York announced Friday that they have filed class action suits against Williams and its spin-off, WCG, alleging the companies misled stockholders as to the potential financial situation of WCG, and Williams’ obligations to the new company. The new lawsuits join at least three others filed since Tuesday.

The class action suits claim Williams issued “a series of material misrepresentations to the market between July 24, 2000 and January 29, 2002, thereby artificially inflating the price of WMB common stock and WCG common stock.”

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