Williams Companies locked up $700 million in unsecured financing through a novel Citibank-led deal that looks like a bond but feels like a bank facility. Citi used a 144A offering, a trust and a series of swaps to provide protection on two revolvers that will be used for letters of credit. It is not the first time Citi has used the structure a deal for TYCO had a similar structure, as did a previous deal for Williams. But it was the right structure at the right time for Williams, said Rod Sailor, treasurer and v.p.
The company, looking for additional liquidity, did not want secured financing because it would not help improve its credit profile in the eyes of the ratings agencies. Williams is trying to work its way to an investment grade rating. "One way to do this is to demonstrate that we have access to unsecured credit," said Sailor. Trouble was, banks had no interest in lending on an unsecured basis. "With our single B rating we can't get an unsecured credit facility," said Sailor. "In our sector, banks want security if you are below investment grade."
Williams approached Citigroup to obtain letters of credit financing. A person familiar with the deal said the financing was too large for Citigroup to obtain protection through credit default swaps. Instead, the bank set up a trust to access credit protection from the bond market through the private placement of notes.
The trust issues credit-linked notes and deposits the proceeds with Citibank. Through an interest rate swap agreement, Citi pays a fixed rate of 4.35% to the trust, which passes that rate onto the investors. Williams' credit agreement with Citicorp allows it to borrow from two facilities a five-year, $500 million revolver and a five-year, $200 million revolver in the form of either letters of credit or straight borrowings. Through a subparticipation agreement, Citi passes on the facility fee it gets from Williams and the credit risk on to the trust.
In the event of a default, Citi is covered by the proceeds of the 144a offering, which came through the trust and are on deposit. Through the subparticipation agreement, the credit facility goes through the trust to the bond investors, who get the corresponding recovery. If there is no default, investors get their $700 million back when the facility matures and earn interest for the facility's five years' tenor duration. "It is the closest to a bond deal as Citigroup could make it," said the person familiar with the deal. "Citigroup targets the same institutional investor market as if Williams is doing a bond deal."
The structure is uncommon, but a good way for Williams to improve its ratings, according to Steve Wood, v.p and senior analyst at Moody's Investors Service. "This is pretty rare. It is more of a function of where Williams is. They went through restructuring and are working to improve their credit," said Wood.
One advantage of the 144A offering is that it has less restrictive covenants than a traditional bank deal. The $500 million unsecured credit facility that Citigroup did for Williams in April last year included both investment-grade and high-yield covenants. The most recent credit facility includes only investment-grade covenants. "We spent a lot of time stripping out covenants on high-grade paper that we did earlier. This doesn't have the same financial tests," said Sailor.