Continuing on towards the goal of restoring its balance sheet to health, the Williams Companies (TWC) said last week that it is finalizing a new $800 million credit facility primarily for the purpose of issuing letters of credit. The Tulsa-based company said Friday that it had completed the agreement ahead of schedule.
The new financing package replaces the old $1.1 billion credit line entered into last summer that was comprised of a $700 million secured revolving facility and a $400 million letter of credit facility.
Williams said the majority of its midstream gas and liquids assets back the old agreement, which was replaced by the new two-year, cash-collateralized $800 million agreement. The new agreement releases the midstream assets as credit backing. Cash collateral would be posted only to the extent that letters of credit are issued under the facility. Citigroup Global Markets Inc. and Banc of America Securities LLC are joint lead arrangers and joint book runners for the new credit facility.
Following the announcement, Moody’s Investors Service upgraded the debt ratings of TWC and its subsidiaries. Williams’ senior implied rating has been raised to ‘B2’ from ‘B3’ and its senior unsecured ratings to ‘B3’ from ‘Caa1.’ In addition, the ratings agency changed the company’s rating outlook to developing from negative.
“While a number of disclosures have been made, Moody’s concludes that certain events and markets must coincide for the management to meet its financial plan, and that only the passage of time will demonstrate the degree of its precision,” Moody’s analyst John Diaz said in a release. “Failure of TWC to meet its financial plan, including asset sales and margin calls as estimated, could result in a downgrade.”
Moody’s rating actions follow an assessment of TWC’s financing plan, including the recent repayment of $1.2 billion in principal and interest of its E&P subsidiary Williams Production RMT Company’s (RMT, formerly known as Barrett Resources Corporation) secured loan prior to its maturity through recent and currently ongoing capital market debt offerings and the replacement of its existing secured credit facilities with a $800 million cash-collateralized credit facility.
Going forward, Moody’s believes that the largest variable in TWC’s financial performance and liquidity is the working capital needs of its marketing and trading segment. The agency said it will monitor how closely the segment’s future margin needs track currently estimated ranges in future price environments. Diaz said volatility in the current gas price environment as well as possible price spikes during the winter of 2003/2004 will provide stress tests to marketing and trading models.
“TWC remains in flux and difficult to forecast even for short periods as it continues to sell numerous assets, some large and significant to the company,” Moody’s said. “This will continue to result in unusual gains and losses, possibly including charges from further asset impairments, to continue to buffet its financial results as businesses are discontinued and sold. It may be a while before we see stabilization and a discernible base line for recurring financial performance, so that there is more certainty in assessing whether the company can turn and stay cash flow positive.”
Earlier in the week, Standard & Poor’s Ratings Services (S&P) assigned its ‘B+’ rating to TWC’s planned $500 million issuance of senior unsecured notes. Standard & Poor’s also affirmed its ‘B+’ long-term corporate credit rating on Williams and the ratings on its subsidiaries. The outlook remains negative.
“A significant credit concern is Williams’ ability to stem the cash drain from the energy marketing and trading (EM&T) business unit,” noted S&P credit analyst Jeffrey Wolinsky, CFA. “For example, EM&T was responsible for a $790 million cash drain in 2002 and for a $292 million cash drain in first-quarter 2002.”
The ratings agency said the negative outlook reflects the weak financial ratios for 2002 and continued, expected weakness in 2003. “If Williams is able to stem the cash drain from EM&T and meet or exceed 2003 financial ratio expectations, the outlook could be revised,” said Wolinsky. “However, if financial ratios fall considerably below expectations, the rating could be lowered.”
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