Williams Companies is a Tulsa, Okla.-based energy concern. A long-time investment-grade company, Williams was downgraded to junk last July. It had $13.9 billion in total debt at the end of 2002. The company priced its first high-yield deal on March 4, a $175 million 144a transaction through its subsidiary Northwest Pipeline Corp.
When can investors expect to see upgrades, or is there a risk of further downgrades?
I'd expect an upgrade but I can't predict what ratings agencies will do.
Have you set forth any goals?
To become an investment-grade company again, but we didn't lay out a timeline.
Any plans to take any subsidiaries public to try to get equity out of the business as opposed to just selling assets?
We intend to operate the businesses more effectively to enhance their cash flows, to de-lever the company and to reduce internal expenses.
An increasing number of fallen angels have included fall-away covenants in their bond deals, which cease to operate if a company becomes investment-grade.What is your view of this practice?
Having fall-away provisions as the project proved itself is certainly a well-documented and well-understood practice when it comes to project finance. We have a lot of experience with it in that realm. So, in terms of it being a natural for the high-yield space I think it is a natural, especially since we have a stated goal of becoming investment-grade.
Have you ever been surprised by the way your bonds trade in the secondary market?
I try not to have a lot of expectations about the day-to-day fluctuations because you can really get wrapped up for no reason at all if you look at it and try to make sense out of it on a daily basis. On a longer-term basis, yes we do follow it, and we are active watchers of what our bond spreads are doing, but to say that I've been surprised--well, yes I have been surprised, more by the trends as opposed to the day to day fluctuations. [A benchmark Williams issue, the 8.125% notes of '12 (Caa1/B) was bid at 86 last Thursday.]
Can you say more about what you mean by the trends?
Well, they took us way too low during the height of the concerns about liquidity last July. It was vastly oversold in my mind and the spreads and dollar price yields in my mind were not realistic. But, that was a function of what people thought at the time.
Is there any fixed-income analyst you feel has a particularly good understanding of the company?
Eric Dybesland at Lehman [Brothers] is pretty good. He's got a pretty good handle on things and he's assisted by Ted Izatt who covered us when we were investment-grade and still provides insights into the company since he covered us for so long.
Can you think of any insights they've had that were lost on other analysts?
I think that they gave management more credit for living up to what we said we would do than some of the other analysts did.
In their published research?
Yes. I think also Jim Gibbons at J.P. Morgan Securities. He hasn't traditionally followed high-yield, but he's followed some of his companies into high-yield land. He's also been one of those that was prepared to say that the company had the wherewithal to do what it said it would do and he's done a nice job as well, I think, of getting it right.
Are there additional high-yield bond deals forthcoming?
We are studying a few additional ideas, yes. We've said publicly that we are looking at the financing of another one of our pipelines. We've also said that we are studying the refinancing of the reserve base loan that we did with the Berkshire Hathaway-Lehman group last year. And, we are exploring ways to potentially refinance some of the Williams Communications Group Note Trust notes that we inherited from them which mature next year--extending the maturity of those.
What would be the total dollar amount of issuance resulting from those deals?
It's difficult to handicap it. What we've said is that we would be thinking of doing somewhere between $150-300 million at the pipeline and we've already done $175 million. We've said that we would be looking to finance at least some of the reserve base loan. We've been somewhat unspecific about how much, but certainly no more than what we originally borrowed and the amount of the Note Trust notes outstanding is $1.4 billion, so there's $900 million on the reserve base loan outstanding and $1.4 billion on the WCG Note Trust notes. It certainly won't be any more than that. It will likely be less than that.
What criteria do you look for when choosing an underwriter for a bond deal?
Experience with the company. Experience in the particular assets that we're trying to put financing against. Experience in the high-yield marketplace. Those are things we look at, and we also look at long-term relationships with the company.
Were there any surprises in the selling of the one high-yield deal you've done so far or the way it has traded since it was priced?
We were very pleased with the execution and very pleased with the pricing we got and the reception it got from the market. I wouldn't say we were surprised but we were very pleased. [The Northwest Pipeline 8.125% notes of '10 (B3/B+) priced at par on March 4 and were bid at 103 last Thursday. Lehman and Banc of America Securities were the co-leads. Also in the underwriting group were Salomon Smith Barney, J.P. Morgan, Credit Lyonnais, TD Securities, Scotia Capital and Merrill Lynch.]
You've been selling assets to plug liquidity holes and you're shrinking the company. At what point do you begin investing in things that contribute to earnings?
Basically what we've said is that we intend to shrink the company down to core positions that we tend to hold and use the proceeds to solidify our liquidity position as well as our overall capital structure. Once that work is done, to the extent we have free cash flow, we'll look very seriously at plowing it back into our business
We're certainly trying to be more innovative and creative about growing in ways that are somewhat non-traditional, and in addition we're still deploying limited amounts of growth capital in our business. It is very limited right now, but we're going to spend a billion dollars this year in capital and you know a piece of that is clearly growth-oriented to complete projects that we already had under contract that were part of the growth strategy for the company.
Any comparisons of high-yield community versus investment-grade?
Yeah, I think the high-yield guys are a lot more interesting after hours than the high-grade guys. I have fun at their conferences.