Sample Business Studies Case Study on Williams Case

The Rate of Return to BH on the Deal and the Calculation

According to the agreement, both BH and LB were to offer Williams $450 million. However, the return of the loan was to come with an interest rate of 5.8% that was to be paid quarterly within the lending period of one year and an additional 14% that was to be paid on top of the interest amount upon the maturity of the loan. Therefore, for the return guaranteed by the loan financed by BH alone, the return will be 167.4 million.

Principal loan = $450 million

Interest = 5.8% * 450 million * 4 = $104,400,000

Interest Accrued upon maturity = 14% * 450,000,000 = $63,000,000

Total Interest = 167.4 million

Principal Terms of the Deal and Impact on Risks Faced by BH

The financing of the loan was to attract an interest of 5.8% that was to be paid on a quarterly basis. In addition, there would be a 14% interest that would be payable upon the maturity of the cash. However, the financing of the loan came with a ‘deferred setup fee’ that would be at least 15%. These were on condition that Williams was going to sell the Barrett assets. Failure to make the sale would mean that Williams would owe 15% of the loan balance as an addition to the ‘deferred setup fee.’ In case Williams managed to sell the Barrett assets, the fee would increase to the largest of 15% of the loan balance or even go higher to 15% – 21% of the net sale price. The financing of the loan was also agreed upon on condition that Williams was able to maintain an interest coverage ratio of greater than 1.5. At the same time, it would have to maintain a fixed charge coverage ratio of equal or at least 1.15 to 1. Williams was also to limit certain payments that included the redemption of capital stock of Williams and the capital expenditures that are in excess of $300 million unless it was for the capital expenses of the borrower.

At the same time, Williams was to involve physically the lender’s attendance rights to its board of directors meetings and any other meetings that involved the committees of the board. Intercompany indebtedness was also to be limited, and it had to maintain parent liquidity of more or equal to $600 million and the maximum of $750 million.

Overall Return to BH Relative to Risks

Financing the loan is a huge risk for BH considering the company is projecting possible market complications and the inability of Williams to sell the Barrett Assets. Despite the huge overall returns that BH stands to gain from its investment, the instability of the market proved a huge challenge in guaranteeing BH that the investment will be paid as per the agreements laid down for the deal. On the other hand, Williams has a good performance record in terms of financial returns and market operations that shows promise in terms of fulfilling the returns and the interest of the deal within the agreed timeline. Therefore, basing on the agreements and conditions of the deal and the possible outcomes as outlined in the agreement for Williams, the loan is a worthy investment on the side of BH.

Amount Williams Needs

At the time of the crisis, Williams needed $900 million as a way of financing his deal for the Barrett assets and ensuring that the financial loan offered was repaid within the one-year period.

The Cause of the Situation

The change of management of Williams to a new CEO triggered the issues that led to the situation Williams was in at the time. Malcolm, the new CEO initiated a four-pronged plan that was meant to sell assets, reach a solution for the energy/ trading book, manage/ monitor cash/ business, and ‘right-sizing’ the company to adapt to the new scope of business. This was maintained as the strategic business approach for the company through to 2002. In December 2001, the company announced a sale of approximately $250 million to $750 million in assets and by May of 2002, it had made sales of $1.7 billion. It later announced an additional sale of between $1.5 billion and $3 billion in the next year. However, a day after the announcement, Williams’ stock fell by 10.6%. This meant a huge financial complication an inability to fund all its operations and market deals properly.

Reasons for BH to Invest

The investment comes with a huge financial benefit on the part of BH with nearly $168 million in return for its loan. However, the agreement as per the conditions of the deal also pointed out that upon closing, the parent of Williams and the CFO (Chief Financial Officer) was to certify that the company was solvent and it would continue to the same after the loan has been provided. This would mean that the financing of the loan still guarantees BH that the amount it invests in Williams is a sure return, which also would mean no loss on the part of BH.