This is a great article on WCOM New Corporate Bonds. - a must read if interested.
WorldCom Readies a Record Investment-Grade Deal And Corporate Bond Yields Rise in Anticipation
interactive.wsj.com
WorldCom, which has shaken up the telecommunications business with its aggressive acquisitions, is about to do the same in the corporate bond market as it readies what could be the biggest investment-grade issue ever.
The company, based in Jackson, Mississippi, plans to market $3-$4 billion of debt this week through a slew of underwriters led by Salomon Smith Barney. And, market players say, if there's enough demand, the offering could be increased and total up to $6 billion, the size of WorldCom's shelf registration.
Right now, Norfolk Southern holds the record for selling the largest investment-grade bond. The railroad company sold $4.3 billion of investment-grade debt in May 1997, according to Securities Data. It would be much tougher for WorldCom to overshadow the largest junk-bond offering ever sold: RJR Holdings Capital's $6.11 billion deal priced in 1989.
To be sure, WorldCom has places to put the money to work. The company is in the midst of buying long-distance carrier MCI. It has to pay British Telecommunications $6.94 billion to buy BT's MCI shares at $51 each. WorldCom will also use its own stock to buy the publicly owned shares of MCI. The deal, which is expected to close this quarter, awaits approval from the Federal Communications Commission and three state regulators.
WorldCom may also need cash to fund future acquisitions. Just last week, MCI announced it would buy Brazil's long-distance carrier, Embratel, for $2.3 billion. MCI bought the company as part of an auction conducted by the Brazilian government. (For more on this, see International Trader.) It's unclear how the acquisition will be funded, and WorldCom officials declined to comment.
One analyst points out that WorldCom doesn't need to raise all that cash in the debt markets at one time. It has a $12 billion bank credit line, a huge commercial paper program, and MCI is cash-rich after selling its Internet business to Cable & Wireless for $1.75 billion. Therefore, this analyst doesn't expect to see a $6 billion deal from WorldCom all at one shot. He expects a smaller deal, with WorldCom returning to the debt markets later this year.
Even so, just the possibility of such a mammoth bond deal has put pressure on corporate bonds. Long-term corporate yield spreads over Treasuries have increased by about 0.10 percentage point over the last week or so. And some traders expect further widening next week. Investors have reportedly been selling existing holdings to make room for the WorldCom deal. Others have sold WorldCom debt they owned in anticipation of the new debt coming at higher yields.
"People know it's coming and they're making shelf space available," says this analyst. The market has also had trouble because the volume of new issues has been quite robust considering it's the dog days of summer, a time when bankers usually head for vacation. Indeed, investment-grade debt issuance is running at a pace that should easily beat last year's record, while junk-bond issuance has already hit new records.
So, the recent supply and the long shadow cast by WorldCom's deal has once again given investors control of the market. Investment-grade companies are taking two to three days to market deals before pricing them, notes Jacques de St. Phalle, head of fixed-income syndicate at Bear Stearns. That's something only junk-bond investors with complicated stories used to take time out for.
And when new deals do get sold, they are priced at a concession to issues already outstanding, he adds. As a result, the entire market reprices and investment-grade traders sing the blues.
WorldCom nevertheless is basking in such a warm glow that investors are expected to line up for this deal despite a soft market. The company has cobbled together various communications companies to offer business customers everything from domestic and long-distance telephone service to Internet access. It also is considered an industry leader because it began knitting together these various telecom services about a year before the competition started to copy.
"They're the farthest ahead in giving the customer end-to-end telecommunications solutions. They have the model that the other phone companies are trying to emulate," says Patrick Cassidy, an analyst at T. Rowe Price.
Just recently, WorldCom and MCI reported earnings that also kept investors happy. WorldCom reported second-quarter revenues of $2.61 billion, a 45% increase over the same period last year. And net income was $228 million, or 21 cents a share, compared with $44 million, or four cents a share, last year. As for MCI, it reported a 30.4% drop in second-quarter profit, which was $195 million, or 26 cents a share. But the market seemed to focus on MCI's revenues, which rose about 11% to $5.4 billion during the same period.
Bond investors can only hope to have a sliver of the success enjoyed by WorldCom stock investors. The shares have climbed by more than 75% since January 1, rising from about 30 to 53. Although bondholders won't have nearly the pop, they too, hope to benefit. There is the widely held expectation that WorldCom's debt, which is currently rated Baa2 by Moody's Investors Service and triple-B-plus by Standard & Poor's, will be upgraded to the low single-A area in the upcoming year.
"I'm probably going to buy [WorldCom debt] on a new-issue basis. It's probably the No. 1 credit you want to own in telecom," says Cathy Bunting, portfolio manager of the New England Bond Income fund.
According to chatter in the market, WorldCom will sell debt with three-, five-, seven- and 30-year maturities. If there's enough demand the company will consider selling 10- and 20-year debt as well. There's no price talk in the market yet, but WorldCom's 7 3/4 % debt due in 2007 traded Friday with a yield that's 1.09 percentage point above comparable Treasuries.
--------------------------------------------------
MARKET WATCH:
The Mercer Report
75 W. Front St., Red Bank, N.J. 07701
JULY 23 ~ Seven mega stocks, Cisco, Coke, Dell, Lucent, Microsoft, Pfizer, and Warner-Lambert are responsible for one-third of the S&P 500's advance year-to-date. All of them possess P/E ratios greater than 50. This focus on so few has all the trademarks of a speculative bubble. Does anyone remember what happened to the Nifty 50 of the early 1970s?
-HENRY D. MERCER III
---------------------------------------------------
A Bearish article:
Double Whammy
That, a technician asserts, is what the stock market is facing
interactive.wsj.com
By Jacqueline Doherty
Danger Zone
Want a good scare? Don't bother seeing Armageddon or reading a Stephen King tome. Just talk to Peter Eliades. The technical analyst, who publishes the Stockmarket Cycles newsletter in Santa Rosa, California, has identified two patterns that may signal that stocks are about to tumble and which, he says, are consistent with the warning of a 1998 downturn, possibly in the summer, that he issued on these pages three months ago.
True, many consider technical analysis akin to witchcraft because it involves no fundamental research. Instead, technicians use charts of the market's historical movements and look for patterns to predict its future direction. But those who take technical analysis seriously would certainly like to know that Eliades' charts are calling for a fall.
The signals come from two indicators: a "double top" pattern and the Sign of the Bear. Independently, he warns, these two are ominous. Together, they give him the chills.
The last time a double top and the Sign of the Bear occurred simultaneously was in 1966. Back then, the Sign of the Bear flashed its warning on January 25. There was also a double top formation in January and again on February 9, when the Dow hit an intraday high of 1001.
From its peak in 1966, the Dow fell 27%, to 735, by October 10. The market didn't break through 1000 again until 1973. Today, a 27% decline would push the Dow down by more than 2,400 points.
Scared yet? Eliades laid out his methods for spotting the Sign of the Bear in Barron's May 4 issue. The Sign came out of hibernation to flash a warning signal on April 6. It sent a second warning July 20.
To Eliades, a Sign can occur whenever there are 21 or more consecutive trading days during which the market doesn't rise or fall much, but instead "churns" sideways. Such churning, he maintains, indicates a top if it is followed by two or three days during which the market falls sharply.
The technician took the number of New York Stock Exchange issues that advanced and divided them by the number that declined. He defined churning days as those with an advance/decline ratio of 0.65 to 2.20. (He decided to raise the top of that range slightly from the 1.95 he used in his May article.)
Eliades next considered the two to three days following the end of the churning period. The Sign of the Bear flashes if the average of the advance/decline ratios on those subsequent two or three days is below 0.75. On such days, there would be strong selling. For example, if the ratio is 0.74, only 100 shares are rising for every 135 that are falling.
Momentum wouldn't let that occur in a true bull market, he argues. A bull market should have days with advancing stocks outpacing declining stocks by two-to-one or more.
The Sign of the Bear flashed for the second time this year on July 20. The advance/decline ratio had remained in the 0.65-2.20 range for 21 days. On the following three days, July 21-23, the ratio went from 0.44 to 0.55 to 0.27.
On July 20, the Dow hit its highest intraday level ever at 9367.84. And the market hasn't been back there since.
Now, an indicator is useful only if it has worked on numerous occasions. The Sign of the Bear has flashed eight times prior to this year and each time it was followed by a sharp decline. (However, not every market downturn is preceded by a Sign of the Bear.) The sign flashed in July 1929, December 1955, December 1961, January 1966, September, October and December in 1968 and December 1972. And after each of those dates, the market slid dramatically, as shown in our table.
Prior to 1998, the sign hadn't been seen in over 25 years. This year, we've seen it twice. Goosebumps, anybody?
The sign may have even more significance right now because the market is, in Eliades' view, forming a double top. Such a top occurs when the market hits a new high, only to decline moderately and then rebound back to a point close to or above the previous high to establish a second top. After the second top, the market declines sharply. On a chart, the formation looks something like two adjoining mountains.
This double top formation has occurred in a dramatic way every 10 years or so. For example, there were double tops in August and October 1987, in September 1976 and January 1977, and in January and February 1966. These were all followed by steep declines. Eliades believes the market again formed a double top on May 4 and July 20 of this year, setting us up for trouble, probably within two months.
"That the Sign of the Bear and a double top have coincided is, to me, very exciting and very bearish. It finally looks as if something is going to happen here to the downside," says Eliades, expressing the somewhat warped view of a market technician.
However, he notes, if the Dow rallies to a new high before the end of August, then the double top and Sign of the Bear indicators will have flashed bogus signals. Conversely, "If the market declines 20% or more [from its record July 20 reading], you'll have to tip your hat to these patterns," says the prognosticator of doom.
In just two months or so, we'll know whether Eliades' dour views are accurate or just the stuff of which B-movies featuring Freddie Krueger are made.
---------------------------------------------------
End of Barrons stories |
