WCG-- Williams Communication files for Bankruptcy
April 23, 2002
TELECOMMUNICATIONS
Williams Seeks Chapter 11 Protection,
Strikes Deal to Distribute All Equity
By ELLIOT SPAGAT and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
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After weeks of trying to rework nearly $6 billion in debt, Williams Communications Group Inc. filed for Chapter 11 bankruptcy-court protection Monday night after striking a deal to distribute all its equity to its bondholders and former parent company Williams Cos.
The filing is yet another sign of the excesses of the '90s telecommunications boom and the severity of the current bust. Williams Communications' bankruptcy-court filing follows a Chapter 11 filing by Global Crossing Ltd., which had more than $12 billion in debt and disappointing results from a number of telephone and telecommunications companies.
In particular, it is a blow to Williams Cos., long a major energy company in Tulsa, Okla., which made a fortune in the 1980s by running fiber through old natural-gas pipelines to build a new telecommunications network. That unit was sold, but once a noncompete agreement expired, Williams jumped back in with Williams Communications and expanded quickly. Last year, it spun off the company to shareholders in a move that now will be sharply questioned.
The filing sets up a showdown between Williams Cos. and the company's bondholders over how much equity each should receive in the restructured company. Williams Cos. says it is owed about $2.4 billion, which would entitle it to nearly 50% of the equity. The bondholders, who are owed nearly $2.5 billion, are expected to cite the rapid failure of the company in challenging the claims of Williams Cos.
If the two parties can't negotiate a settlement on the division of equity, the bondholders are likely to press for the bankruptcy court to decide the issue.
At the end of last year, Williams Communications had $5.91 billion in debt and $5.99 billion in assets.
"First we're going to find out whether or not [Williams Cos.] did anything wrong," said Richard Wynne of Kirkland & Ellis, who represents an ad hoc committee of bondholders. "We think that just the fact of the company's quick financial failure points to some problems with the structure of the spinoff."
Just before the filing Monday, the company repaid $200 million of its $975 million in bank debt to a group led by Bank of America. It has committed to paying the debt down to $525 million. It also agreed to raise an additional $150 million, either through new debt or equity. Williams Communications, whose 33,000-mile network connects 125 U.S. cities and five continents, had about $1 billion in cash at the end of last year.
The filing was made in U.S. Bankruptcy Court for the Southern District of New York.
The agreement allows the company to continue operating even if the former parent and the bondholders disagree over how to split ownership, said Scott Schubert, Williams Communications' chief financial officer. "That certainly was our objective. That was our understanding with the parties."
The deal caps three weeks of negotiations between the carrier, its bank lenders, holders of its senior notes and Williams Cos., which spun off the company about a year ago.
Williams Communications said on Feb. 25 that it might file for bankruptcy protection. Since then, it has delayed deadlines to restructure its bank debt and has delayed interest payments due on $1.7 billion in senior notes.
Williams Cos. said it believes it has taken steps to reduce the impact of the bankruptcy on it shareholders. The company at year-end wrote down the value of its Williams Communications investments to about 20 cents on the dollar. It said it is assessing whether other write-downs will be necessary.
The energy concern also lists $154 million in assets for leasing a headquarters building, furniture and aircraft to its former subsidiary. Earlier this year, it assumed interest payments on $1.4 billion in Williams Communications notes and purchased a network that it had to sell back to Williams Communications.
SBC Communications Inc., the San Antonio Baby Bell, is Williams Communications' largest customer by far, accounting for about one-third of its revenue of $1.19 billion last year. SBC owned a 4.1% equity stake in Williams Communications, which will be wiped out along with other existing shareholder equity.
Williams Communications approached Williams Cos and SBC several months ago about injecting equity into the company but both declined, according to people familiar with the matter.
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