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Stocks W / WilTel Communications


Subject:  Debt, banks and vultures Date:  4/17/2002  4:39 PM
Author:  MichaelD50 Number:  1438 of 1481


Please recall that WCG previously was buying back its debentures at about 50 cents on the dollar. Personally, I loved it. WCG actually purchased $551M at a price of 43% of face, for a gain of $296.9M. These were Senior Redeemable Notes. (See the 10-K footnote 12, Long-Term Debt *.pdf page 98.) But consider that the banks are in a first secured position and are fearing the Company is using its billion in cash ($116M in cash, $904M in liquid securities) to buy up two billion in debt from creditors that would ordinarily stand behind the bank in a foreclosure. Consider also that the telecoms have "fallen out of favor" and simply died, leaving the banks holding worthless receivables. Bankers are not known for being aggressive in supporting their customers - the loan officers get fired when their performance ratings tank. So we have a situation where the banks are reviewing their picky tiny print and searching for a default by WCG so as to a) stop WCG from paying off secondary creditors and b) send a little of that cash their way. As part of the agreement in those default discussions, WCG agrees not to buy up other debt. The bankers are eyeing WCG's cash position and want to reduce their exposure in our beloved telecom.

The actual default, as reported by WCG in its 10-K (Part IV, *.pdf page 146) refers to “. . . possible default related to the fact that, due to negative developments in the telecommunications industry and the value of WCG's assets, the banks question whether WCG could confirm the representations and warranties included in the credit facility. The banks also reserved their right to claim that the purchase by WCG of its senior redeemable notes in 2001 violated the terms of the credit facility.”

WCG, on the other hand, has a business plan that does not generate cash flow until next year. They are counting on their treasury to carry them over until then. The original cash and financing plan was part of the spin-off and essential to the funding of the original plan – the same plan that the banks agreed to then, and the same plan the banks are attempting to destroy now with their demands against WCG. Of course, we are somewhat missing the plan, given the crashing of certain competitors and the reduced rates being charged by them today.

I have always appreciated the ability of the Williams Companies in keeping to their plans. I have attended their seminars and read their materials. I recall specifically (when the telecoms were really rolling) their comment that the market had valued the WCG part of their company as the stock's share price. Essentially, by buying Williams, you paid for the telecom part and got the energy part free. Their point was that the stock was way under-valued. To accurately reflect the total value of the company, WCG was spun off (and essentially kept its telecom value) while WMB was separated (and valued as an energy company). They kept essentially every representation made by management in the creation of the telecom. This is their second venture in to fiber and they certainly have the experience to support their plans. WilTel was built up over ten years and sold to LDDS in 1995 (for $2.5B and a gain of $1.0B). They retained parts of WilTel, WilTech, and a Vyvx strand and began recreating the WCG structure in 1998, virtually the day the non-compete agreement expired.

Were you aware that lenders, when they replace management's decisions with their own, step in to the shoes of management and Directors and can be sued for their negligent actions in failing to perform their fiduciary duties as managers and Directors? My point: the banks have a narrow line to walk in reneging on their original deal after signing off on the business plan in place.

WMB has a guarantee on the WCG debt as part of the spin-off.

Part of the changes in Long Term Debt for WCG is the elimination (in addition to a chunk of senior notes) of the “TWC Note” for $975M. The Williams Companies are still behind the note with the addition of the “Williams Trust Note” for $1.5B. The guarantee in place for WMB provides that WMB becomes an unsecured creditor of WCG in the event of payment on default. (10-K, footnote 12, Long Term Debt *.pdf page 98).

WMB has sold assets and recovered the primary position for that debt – even to the extent of buying out the leased facilities and assuming the lease position against WCG. The impact on WCG is negligible compared to its position before. Instead of owing the banks and certain private third parties, WCG now owes the banks and WMB as their primary second creditor. No real difference to the WCG financial statements (as to the debt, at least). Politically, the difference is significant.

The bankers were threatening the company. The company responded in various ways, including the return threat of Chapter 11 bankruptcy. In bankruptcy, the loans are reclassified on the banks' books as “non-performing”, causing the recognition of significant loss reserves. Exit left, the responsible bank officers to the ranks of the unemployed.

Oklahoma has been through several oil busts. Each time, the bankers have salvaged what they could in the dismantling of an entire state industry. When the oil industry returns, the bankers line up to loan new money. The oil barons have learned to fish the bankers in the good times (the seven years of plenty) to strike deals that will carry them through – or as least hold the bankers at bay – during the hard times (the seven years of drought – this is the Bible Belt, after all). Parker Drilling was particularly good at this. (Rig debt was non-recourse except to the specific drilling rig. Bankers don't want to own a stacked rig and pay the storage cost. Parker was able to win significant concessions from the banks and still retain possession of their drilling assets during the last oil bust.) The Tulsa oil industry is truly a close group of individual leaders, in spite of being NYSE “national” companies: Williams Companies; Parker Drilling; Helmerich & Payne; Reading & Bates - all have their patriarchs. (Now second and third generations, of course, but you get my point). These guys are not amateurs in dealing with adversity – and nasty creditors (aka “evildoers”).

Although I suspect the threat of Chapter 11 was a little “over the top” in dealing with the banks, its publication has driven the Company to publically discuss it as an option.

A Chapter 11 is a “reorganization” or “holding” bankruptcy that buys the company time to organize its activities and demonstrate its ability to repay its creditors. The bankruptcy trustee can determine the company will not survive and take actions that might include conversion to Chapter 7 – complete liquidation of assets. The trustee has an obligation to consider all creditors and the employee ranks in coming to a decision. The analysts are already reporting more along the terms of liquidation and the destruction of the common stock holders. They should be paying more attention to the political situation of this case – and the City of Tulsa courts! Oklahoma has had its share of damage in the loss of companies through transfers elsewhere and simply dissolution. Phillips heading to Texas from its traditional home in Bartlesville is a recent case in point. How will the Court deal with a bankruptcy filing given that WMB is the largest creditor?

During the “creditor's meeting”, the bankers will be given the opportunity to explain how their deal has changed from its inception which justifies driving the company to the wall. The other creditors (WMB) will be given the opportunity to present their opinion as to the best course of action to handle all creditors. The company (WCG) will be given the opportunity to present a case for the continuation of the company as is, in accordance with its long-standing business plan. They will report their success in signing up new clients, the completion of their long-haul infrastructure, the completion of construction and elimination of those plan costs, the work-force reduction and elimination of various fixed and variable costs, and cash flow projections that support the court-protected continuation of the company, essentially in accordance with the original business plan (to which the bankers were committed originally) but with the benefit of the recent drastic operational cost cutting. By this time, the Global Crossing “disaster” (and other fiber companies) impact on the industry, that company, and their State might be apparent and brought in to the picture to illustrate the folly in any attempt to sell assets and liquidate WMB's child company. There will be every incentive to the Court to continue the company as is, particularly with the destruction and damage of its competitors.

But prophecy only seems to come true in hindsight. What else might happen? WMB could bid $5B for the assets in liquidation, paying for it with their $3B in debt and assuming the $2B in bank debt. Think of it as a “reverse spin-off”. Or a third party will bid more, in which case WMB receives $3B in cash (remember, WCG owes WMB and there is no reason for WMB not to bid at least its debt investment to reacquire the telecom assets). With the interest in “re-leveraging” its balance sheet, WMB would achieve significant analyst's “brownie points” by eliminating the WCG receivable and paying off the WCG debt picked up on WMB's balance sheet.

Or on April 26, the bankers will express their satisfaction that the Company is essentially meeting its credit facility requirements (or the requirements have been waived, re-written, or extended), allowing the Company one more year to prove its existing business plan.

Would WCG's assets be worth WMB's bid? The historical cost for the infrastructure is $4,954M. After depreciation of $601M, net value is $4.3B. (10-K footnote 10, Property, Plant & Equip. *.pdf page 97). Add the $1.0B in cash and there appears to be value there somewhere. The capital assets have existing revenue contracts and a customer base that will appreciate continuation. Sure, historical cost is not indicative of current value, particularly in a distress situation. A liquidation sale at that cost or net book value means that the common stock of WCG is “toast”.

So, management is presenting its worst case, announcing in its Discussion (10-K *.pdf page 39) WCG is evaluating a Chapter 11 reorganization as a means to maximize enterprise value, support the uninterrupted continuation of the business and minimize the damage to customer and vendor relationships that uncertainty about WCG's financial condition might otherwise create. Although WCG believes that, if it chooses to reorganize under Chapter 11, these objectives can be furthered by the negotiation of a plan of reorganization prior to filing for bankruptcy protection with some or all of its stakeholders, WCG cannot assure that it can negotiate a consensual plan of restructuring prior to any filing or at all. WCG is engaged in discussions regarding the restructuring with representatives of three of its major stakeholders, The Williams Companies, Inc. (TWC), certain holders of its senior redeemable notes and its bank group. The option pursued by WCG will depend in part on the outcome of these discussions. The Chapter 11 reorganization currently being evaluated would likely result in substantial, if not total, dilution of WCG's shareholders.

My crystal ball says no bankruptcy action will be filed. Even if it were to be filed, WCG will continue with little change in operation, achieve its planned objectives, and be re-listed on NYSE. Or in the worst case, WMB will recover its guarantor “investment” and pay down its own debt for which the restructured WMB balance sheet will add value to its own stock.

Until an official announcement is made, no amount of speculation on this Board will be particularly relevant.

If you don't like compound prophecy, boil it down to just, “What, me worry?”

“The Ostrich”

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