1. How does Williams get into financial distress?
a) Write-off of investment in WCG
During the Tech Bubble, the whole telecom market that WCG was involved in suffered a lot of problems due mainly to a large oversupply, as indicated by an estimated 2% to 5% of the fiber- optic lines which were only carrying traffic. There venue of WCG eventually plummeted, wherein prices of the lines decreased by more than 90% from 1998 and 2002.When WorldCom filed for bankruptcy protection in July 2002, it became apparent that the telecommunications sector was experiencing a lot of problems. WCG itself also began to experience a lot of financial stress, and in hopes of supporting it,
Williams converted notes to shares, providing “credit support” of $1.4 billion of WCG’s debt (which Williams listed as an off -balance sheet item).Despite attempts to lessen WCG’s debt burden through raising new funds, WCG still had problems paying off its debts. While it managed to at least pay the required interest payments, it was not able to meet certain “covenants” and a breach was created with its secured creditors. This has caused WCG’s debt rating to fall due to “weakness in financial performance, lack of forward visibility, and exposure to customers whose risks are increasing.” In the end, Williams took a one-time accounting charge of $1.3 billion of guarantees and payment obligations. The problems with WCG ended up affecting Williams as well, causing Williams’ net income after extraordinary items to plummet, making it less desirable for creditors and investors.
b) Unforeseeable market conditions for energy trading
The Energy Trading market also experienced its own share of problems and issues. For one, because of the collapse of Enron, the market condition for energy trading became very unclear. This led to most competitors in the industry choosing to switch focus or scale back. In addition, Williams Energy Marketing and Trading also experienced its first loss in 3 years. was suffering from deteriorating credit ratings and increasing yields, and it provided a huge risk on the company’s ability to participate in the market. Due to the nature of the business, where “Obtaining credit was especially important when trading long-dated positions, such as ‘prepays’,” this issue became a huge problem.
c) Ongoing inquiries from regulators about reporting and energy trading
Williams was also facing an Investigation by the SEC concerning the collapse of WCG and its financial reporting. This could lead to a few more problems for the company. In the end, the final indication of Williams’s financial distress can be reflected in the decrease in William’s stock price by more than 90% in the past year; with $2.95 per share in July 2002.
2.1 What are the some specific/potential costs of financial distress for Williams?
Direct Costs: Legal, accounting and professional consulting fee.
WCG seeked to reorganize under the U.S. bankruptcy code in 2001, producing huge costs on legal and professional services related to reorganization. For example, Williams took a one-time accounting charge of $1.3 billion related to guarantees and payment obligations due to lingering ties to WCG.
Indirect Cost: 1) Loss of Suppliers:
Because it is an assets-based business, Williams spent about $2 billion a year on capital expenditures. With the onset of financial distress, suppliers may now be unwilling to provide the firm with machines or they may begin requesting for payment by cash rather than credit, further limiting the company’s transactions.
2) Loss of Employees:
Since the firm is facing financial difficulties, it will not have enough resources to offer job security to all of its employees. For example, in the case, Williams’ rival, Aquila Inc., dismissed its entire staff of 1,290 people. Because Williams is in the same situation, it may have difficulty hiring new employees and existing employees may even quit or be...
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