WorldCom Bond Default Said More Likely
By Jonathan Stempel
NEW YORK (Reuters) - WorldCom Inc. (NasdaqNM:WCOM - news) bond investors are convinced the company is more likely to default on its bonds than make all interest and principal payments.
Prices of WorldCom's benchmark 10- and 30-year debt plummeted about 10 cents on the dollar on Monday to below 50 cents. Its shares also fell some 23 percent to a new low.
Some analysts believe a bond price below 50 cents suggests investors consider default more likely than recovery.
"When you see a bond drop that precipitously, the market is telling you that default is a real possibility," said Eric Tutterow, a Chicago-based analyst for high-yield research firm KDP Investment Advisors.
The No. 2 U.S. long-distance telephone company's bonds and shares have plummeted on fears over WorldCom's ability to meet debt payments, amid a telecommunications market buffeted in a weak economy by price wars, excess capacity and reduced customer spending.
WorldCom, based in Clinton, Mississippi, said last week it has enough cash to pay its debts, and could sell about $2 billion of assets to raise cash if needed. The company was not immediately available for further comment on Monday.
Some investors expect WorldCom's credit ratings, cut last week to two notches above "junk" status, to follow those of Lucent Technologies Inc. (NYSE:LU - news) to junk.
"WorldCom is trading like a 'single-B' credit," a medium junk grade, said Cindy Cole, who helps invest $5 billion for National City Investment Management Co. in Cleveland, which has a "very small position" in WorldCom bonds.
WorldCom's $4 billion of 7.5 percent notes maturing in 2011 were bid Monday at 48 cents on the dollar, and its $4.6 billion of 8.25 percent bonds maturing in 2031 at 46 cents.
Those correspond to yields to maturity of 20.27 percent and 18.07 percent, equivalent to a respective 15.16 and 12.44 percentage points more than similar maturity U.S. Treasuries.
A corporate bond that yields 10 percentage points more than Treasuries is "distressed," according to Merrill Lynch & Co.
WorldCom's 6.5 percent notes maturing in 2004 were bid Monday at 60.5 cents on the dollar to yield of 35.29 percent. That's almost 50 percent above the 23.94 percent average yield in the "junk" telecom bond sector, Merrill Lynch said.
FOLLOW THE BONDS
WorldCom shares traded Monday afternoon on Nasdaq at $2.53, down 74 cents, or nearly 23 percent, after earlier falling to $2.57. They have fallen 96 percent from a split-adjusted high of $64.51 in June 1999.
"The equity market is looking to the bond market, and the bond market is questioning whether WorldCom is viable in the long term," said Patrick Comack, an analyst at Guzman & Co. who has a "sell" rating on WorldCom.
"Some people are actually betting WorldCom is going to go bankrupt, maybe in 2003 or 2004," he added.
WorldCom is the No. 10 U.S. corporate bond issuer with $22 billion of bonds outstanding as of March 31, according to Lehman Brothers Inc.
The company has about $872 million of debt maturing this year, $3.25 billion in 2003 and $2.6 billion in 2004, according to fixed-income research service CreditSights Inc. It also has a $2.65 billion credit line that expires in June.
Moody's Investors Service rates WorldCom senior debt "Baa2," while Standard & Poor's rates it "BBB." Both warned that further cuts are possible.
Tutterow said some junk bond investors own WorldCom bonds, "but there doesn't seem to be much interest in adding more."
Cole, said investment-grade bond investors may be selling the bonds if they expect a downgrade to junk.
"It may be an overreaction because WorldCom has significant assets," she said. "Time will tell."
(Additional reporting by Ben Klayman in Chicago.)
biz.yahoo.com |
