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Analysts Say Investors Are Missing The Picture On WCG Paper Trust

Sell-side energy analysts say investors are overlooking a great buying opportunity in notes issued by WCG Note Trust, a debt-issuing entity created by the Williams Companies and its former subsidiary, the Williams Communications Group. Though coupon payments on the notes are paid by Williams Communications Group, they are backed by the Williams Companies, a natural gas pipeline company. The $1.4 billion 8.25% notes of '04 (Baa3/BB+) were issued in March at 400 basis points over Treasuries and were trading at 370 last week. Slightly higher-rated paper from other pipeline companies such as Enron and El Paso trades well inside those levels. Enron 6.62% senior notes of '05 (Baa1/BBB+) were at 150 over the curve last week and El Paso 8.6% of '03 (Baa2/BBB) was at 140 over. The Williams Companies 7.5% notes of '31, which at a rating of Baa2/BBB- is a notch higher than the WCG notes, were at 215 off.

Williams Communications has a junk rating, but Williams Companies has an investment-grade rating. The ratings are different, according to Judith Waite, an analyst at Standard & Poors, because the WCG Note Trust bondholders are behind, or subordinate to, the holders of the Williams Companies' 30-year paper in the capital structure. However, Ted Izatt, an analyst at Lehman Brothers, says the capital structure distinction is not worth 200 basis points. "People don't understand the structure, and therefore are missing a great opportunity," he says, arguing that the bonds should probably trade in the low 200's, even to theOsprey 7.79% notes of '03 (Baa2/BBB), a pipeline concern with similarly structured notes.

Paul Tice, an analyst at Deutsche Banc Alex. Brown, says that while he believes investors understand the structure, the WCG Note Trust paper is still cheap. Tice points out that Williams Companies has received a positive ratings outlook from S&P, and an upgrade would raise the WCG Note Trust paper to full investment-grade status, dramatically increasing the universe of investors who can hold it. "Even if it doesn't get an upgrade, you're getting a three-year piece of five-B, [meaning one rating is investment grade, one is junk,] energy paper at 400 off," he says.

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