WCOM bonds set to go to junk? Looks like it>
New York, April 29 (Bloomberg) -- WorldCom Inc. bond yields soared to 20 percent, a sign money managers are betting the second- biggest U.S. long-distance phone company's credit rating will be cut to junk. The company's shares fell by almost a third.
``Investors aren't satisfied the company can stave off a cut to junk,'' said Joe Dvirgilio, senior telecom analyst for Societe Generale in London. ``The door is wide open for them to fall to junk status, and that's suddenly extremely disturbing.''
Money managers are concerned that Moody's Investors Service and Standard & Poor's will lower credit ratings for 10th biggest corporate debt issuer in the U.S. A cut to junk would cause investment funds to sell WorldCom bonds because many are restricted from holding speculative-grade debt.
The company's $4 billion of 7 1/2 percent bonds due 2011 dropped 9 cents to about 48 cents on the dollar, giving a yield of 20.3 percent, up from about 10 percent at the start of April. The bonds yielded 6.5 percent in January. They currently pay 15 percentage points more than U.S. government debt of similar maturity, up from 10 percentage points earlier this month and as low as 1.7 percentage points in January.
``Stay away from the bonds for now, even though they are extremely cheap --there's no quick fix for this company,'' Dvirgilio said.
The company's stock price fell 92 cents, or 28 percent, to $2.35. The shares, down 84 percent this year, peaked in June 1999 at $61.99.
Dropping WorldCom to junk would also sink the value of other high-yield bonds, hurting the returns of junk bonds, which last month were the second-best performing asset class in fixed income with March returns of 2.5 percent including price increases and interest payments.
Junk Levels
WorldCom cut its projected 2002 earnings on April 19 before interest, taxes, depreciation and amortization by about 12 percent to $7 billion to $7.5 billion.
The reduction prompted S&P and Moody's to cut their ratings on WorldCom to two levels above junk, and the grades are on watch for further cuts. The Clinton, Mississippi-based firm reported on Thursday that its first-quarter profit tumbled 78 percent to $130 million and sales dropped 7.8 percent to $8.12 billion.
Dollar-denominated debt of ``BBB''-rated telecommunications firms maturing in five to 10 years yields 8.8 percent, according to a Merrill Lynch & Co. index, which includes WorldCom. The yield gulf indicates investors anticipate WorldCom won't retain an investment-grade rating for long.
While WorldCom's debt has slumped, many of its triple-B rated rivals are still finding demand for their bonds. Deutsche Telekom AG, which is readying a sale of as much as $7 billion of bonds, has seen spreads narrow on its debt in recent weeks.
``Disconnect''
Deutsche Telekom's 3.5 billion euros of 6.625 percent bonds due 2011 yield about 7.25 percent, 2.14 percentage points more than German bunds. That's down from a premium of as much as 2.61 percentage points in February.
Corporate bonds rated ``B,'' the second tier of the junk scale and about six levels below WorldCom, yield 11.2 percent, while ``C''-rated debt, the lowest grade before default and about 12 levels below ``BBB,'' yields 23 percent.
``There's a disconnect between WorldCom's rating and its bond price,'' said Cory Jackson, who follows debt of telecommunications firms for U.S. Bancorp Piper Jaffray.
Lucent debt yields between 10.6 percent and 14 percent depending on its maturity. Xerox bonds yield as much as 15 percent. Lucent, the biggest U.S. phone-equipment maker, was cut to junk in June and is rated ``B2'' by Moody's and ``B+'' by S&P. Xerox, the No.1 copier maker, is rated ``Ba1'' and ``BB.''
WorldCom has $29 billion of bonds outstanding, including $2.6 billion maturing next year and an average of $2.4 billion coming due each year between 2004 and 2008, according to Bloomberg data.
``Significant Risks''
The company is already in talks with banks about renewing a $2.65 billion credit line that expires in June. It will also have to repay $2 billion it's borrowed through an asset-backed securities program if its ratings drop to junk.
``There are significant risks associated with the company being able to service debt maturing in 2003'' without raising new funds, Jackson said. The company may have to draw on its credit facilities with banks because prices on its existing bonds indicate it couldn't pull off a bond sale, he said.
Still, on a conference call last week, Chief Executive Bernard Ebbers said the firm has enough cash and assets to repay debt.
Ebbers and other WorldCom executives need to cut more costs to ward off a rating downgrade, said Bentley Myer, who helps manage $2.5 billion of bonds at William Blair & Co. Myer said he sold 95 percent of his WorldCom holdings in the past two months.
``They've got to come forward with a more credible plan,'' Myer said. ``You have to keep expenses at the same rate of decline as the revenue is going down.''
SEC Probe
The company's bonds traded at junk levels even before it lowered its growth forecasts earlier this month. Yields climbed last month after the U.S. Securities and Exchange Commission said it's probing WorldCom's accounting methods and also investigating loans the company made to Ebbers.
``The real panic set in when the company revised its (growth) guidance sharply downward,'' Societe Generale's Dvirgilio said. ``It was one thing for investors to be concerned about possible improprieties in accounting, but quite another when they are faced with declining operating fundamentals and concerns about the company's cash generating ability and liquidity.'' |
