WorldCom Is a Good Buy, To a (Very) Few Investors
Buy WorldCom?
On the surface, few bets seem less appealing: The company acknowledged an accounting fraud that
turned out to be the largest in corporate history. It is under bankruptcy-court protection. The stock,
delisted, is a candidate for wallpaper.
However, some adventurous big guns in the investment world are snapping up WorldCom debt,
sensing value in the troubled company and maybe even a chance to gain some control of the
company. David Matlin, one of the most successful investors in distressed debt, and Carlos Slim,
considered Latin America's wealthiest man, have been accumulating big positions in the company's
cut-rate bonds. Other savvy investors who specialize in so-called distressed debt also have been
building positions in WorldCom Inc., traders say.
The purchases, which have helped send WorldCom's bonds climbing to as high as 18 cents on the
dollar from 13.5 cents over the past 10 days, are creating a buzz on Wall Street trading desks.
A hedge fund controlled by Mr. Matlin, a superstar trader at Credit Suisse First Boston who left this
summer to start his own fund with Mark Patterson, another former top CSFB executive, has spent
more than $300 million to buy WorldCom's bonds in recent weeks, according to people familiar with
the situation. The purchases, by MatlinPatterson Asset Management, amount to about 10% of
WorldCom's $24 billion face amount of bonds.
People close to the situation say Mr. Matlin is trying to
raise perhaps as much as $1 billion to further increase
his position. WorldCom officials are watching his
moves closely, because they quickly could amount to a
blocking or controlling position in the largest
bankruptcy-court filing in U.S. history. The purchases
could both help and complicate WorldCom's efforts to
turn itself around. Mr. Matlin, 41 years old, specializes
in taking big positions in troubled companies and
pushing for control of the turnaround process and the
companies themselves. A representative of MatlinPatterson wouldn't comment on the WorldCom
bond purchases.
At the same time, Mr. Slim has been buying the bonds through one of his companies, brokerage
firm Inbursa SA, according to his son-in-law Arturo Elias, a company spokesman for Telefonos de
Mexico SA, the telephone company controlled by Mr. Slim.
Mr. Elias declined to specify how much Mr. Slim has spent, though traders estimate his investment
to be as high as $200 million. "It's simply a financial investment," Mr. Elias says.
These big investors, of course, aren't expecting the bonds to soar to trade at levels approaching face
value, but their moves do suggest that there could be money to be made at the current levels -- if
one is patient. It appears that Mr. Matlin's strategy, in particular, is to buy enough bargain-price debt
to gain a say in how WorldCom eventually restructures, and receive a big chunk of the company's
stock when it emerges from bankruptcy, according to some traders following the situation. Mr.
Matlin may even be angling to wrest control of the company.
Many big mutual funds are dumping their remaining positions in WorldCom, and some analysts
doubt the company can ever be a big money maker in the overcrowded telecom business, even if it
succeeds in escaping from bankruptcy court washed free of its total $42 billion in debt, which
includes trade debt and other borrowing. The company's MCI unit has debt outstanding that is
trading at much higher levels. Holders of that debt argue they have superior claim over the
company's assets compared with those who own WorldCom's bonds.
But the bond purchases coincide with some signs that
the company has been successful in retaining the bulk
of its customers during the bankruptcy process and
that WorldCom won't be liquidated, despite growing
pleas by rival Baby Bells. WorldCom's recent financial
statements have added some reassurance, revealing
that the company still pulls in almost $29 billion
annually in revenue, with many large business
customers sticking by it.
At the same time, some investors sense that the
selloff in the telecom business may finally be winding
down, despite continued gloomy news, such as
Friday's two-notch downgrade by Moody's Investors
Service of the debt of
telecommunications-equipment-maker Lucent
Technologies Inc., to highly speculative Caa1.
"It appears WorldCom's revenue levels are intact, and
on that basis there could be a recovery value that is
much higher than where the bonds are trading," says David Feinman, a managing director at Société
Générale, the large French bank. "Many people believe the existing bonds will be turned into equity
for the company to emerge from bankruptcy."
Analysts doubt Mr. Slim would try to gain control of WorldCom, which has complained to U.S.
regulators about former monopoly Telmex's efforts to slow WorldCom's expansion into Mexico's
phone market. But his investment has raised some eyebrows at WorldCom because Mr. Slim sits on
the board of SBC Communications Inc., a WorldCom rival that has been among the most outspoken
in arguing against the company's emergence from bankruptcy court.
Widely viewed as Latin America's wealthiest man, Mr. Slim made his fortune by buying up
distressed companies. In the past few years he has been on a spending spree in the troubled U.S.
retail sector. His holdings include a controlling stake in CompUSA, and minority positions in Circuit City Stores Inc., high-end retailer
Saks Inc. and OfficeMax.
One reason WorldCom is so cheap: Many investors have been burned buying the bonds. Many experienced distressed-debt-fund
managers bought the debt earlier this year when it was trading above 40 cents on the dollar, only to suffer big losses as the accounting
problems mounted. So even though some investors continue to see value in the company, many aren't willing to add to earlier, so-far
losing bets.
Investing in WorldCom is risky, to be sure. The telecom-investment bubble left more than enough capacity -- and little hope that
companies can begin raising prices. Indeed, many big telecom providers are hounded by heavy debts and likely will continue to cut
prices, rather than raise them, to retain customers.
That puts a crimp on profit margins, but fans of WorldCom argue that the company's debt is so cheap, relative to that of other big
telecom companies facing the same pressures, that the risk is worth it. And unlike many rivals, WorldCom has millions of customers,
which can be expensive to lure. A reborn WorldCom could be washed free of debt, even as competitors continue struggling with it,
putting the company in the catbird seat. People close to the matter say MatlinPatterson likely will urge WorldCom not to cut prices, a
move some in the business have been predicting, but keep them steady, to plump earnings.
For Mr. Matlin, the investment is something of a departure. While at CSFB he was able to generate annual returns of about 40% usually
by buying up huge chunks of defaulted debt, often at the lowest tier of a company's capital structure.
He would then work to gain control, bring in new management and engineer a profitable turnaround, usually after a sale to a competitor.
But his new $2.2 billion firm already has invested most of its current cash, so it may have a tougher time gaining control of WorldCom
on its own.
People close to the matter say the firm has yet to meet with WorldCom's executives or the current bondholder committee, but such a
meeting could take place in the future.
Source - Heard on the Street
Larry's off the wall prediction #17 T buys WCOM. |
