Merrill advises overweighting Williams Cos. junk bonds

New York, Sept. 30 - Merrill Lynch & Co. high yield analysts put an overweight rating on Williams Cos.' bonds.

Williams has strong liquidity prospects and should be able to continue to deleverage, according to Merrill high yield analysts Leo Kelser, Tatyana Dobryanskaya and David Silverstein.

In addition, they see Williams as a core holding in the power and energy sector and say it should have investment grade credit characteristics by 2005 - although the rating agencies may not upgrade it so quickly.

Previously the Merrill analysts assessed Williams' debt as marketweight.

The analysts noted that their recommendation incorporates the fact that Williams' bonds currently trade in the 7.6% area versus 8.5% for the overall high yield market.

"Although WMB is still rated in the single-B category, the bonds trade better than that as investors are looking at the strong liquidity and improving credit metrics," wrote Kelser, Dobryanskaya and Silverstein in a new report.

"While we expect that WMB will achieve investment grade metrics by the end of 2005 based on our expectations of substantial debt reduction, it may take the agencies longer than that to actually upgrade the company to investment grade."

A successful exit from the energy marketing and trading (EMT) business would help the move to high grade, significantly reducing the risk profile and likely translating into an improved business position designation from Standard & Poor's.

While Williams appears active in trying to sell the EMT business the analysts caution it could "take some time."

By the end of 2005, the analysts forecast Williams' debt to be $8.6 billion, down from $13.0 billion at June 30, 2003. Net debt could be as low as $5.9 billion in 2005.

They see debt to EBITDA improving to 4.2x in 2005, with net debt to EBITDA as low as 2.8x compared to 5.9x for the past 12 months.

For 2004, the Merrill analysts expect Williams to turn free cash flow positive, generating $239 million and then $625 million in 2005.

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