WorldCom Boosts Record Bond Sale to $6.1 Billion (Update3)
Bloomberg News
August 6, 1998, 11:07 p.m. ET
WorldCom Boosts Record Bond Sale to $6.1 Billion (Update3)
(Adds WorldCom to take charge for MCI-related R&D in 7th
paragraph.)
New York, Aug. 6 (Bloomberg) -- WorldCom Inc. sold a record
$6.1 billion of bonds to investors hungry for securities of what
will be the second-largest U.S. long-distance phone carrier after
AT&T Corp.
The Jackson, Mississippi-based company boosted the sale
three times to meet demand. The bonds were sold in four parts,
with maturities ranging from three- to 30-years and yields of
6.163 percent to 7.025 percent.
WorldCom sold the debt to help pay for its $47.2 billion
acquisition of MCI Communications Corp. and will use proceeds to
buy British Telecommunications Plc's 20 percent stake in MCI.
The bonds were well received, even though lackluster demand
forced several companies to postpone or reduce their sales in the
past two weeks. Investors snapped up the bonds because they like
the company's business prospects.
''They have excess capacity,'' and are ''the fastest growing
company out there in terms of revenue,'' said Nicholas Walsh, who
helps manage $1 billion of fixed-income assets at J & W Seligman
& Co. in New York. Walsh, who bought some of the seven-year
notes, said WorldCom's strength in Internet and data services was
a strong plus, along with its ability to hit its cost cutting
targets.
''Many investors believe that this will be a single-A
credit within a year,'' said Geoffrey Coley, managing director
and head of investment grade capital markets and syndicate at
Salomon Smith Barney, which led investment banks underwriting the
sale. ''It was a major factor driving demand.''
Separately, WorldCom estimated it would take a charge of $6
billion to $7 billion for in-process research and development
acquired with its purchase of MCI. The research charge would
raise annual earnings down the road by as much as $175 million by
cutting the size of future acquisition-related write-offs taken
over a period of years.
Improving Ratings
WorldCom's senior debt was raised two notches last week to
''BBB '' by Standard & Poor's Corp. Earlier, Moody's Investors
Service raised its rating to ''Baa2.''
Last month, WorldCom reported that its second-quarter
earnings rose more than fivefold from the same period last year
on surging sales of Internet and other data services.
The new bonds will be free to trade in the secondary market
tomorrow, Coley said.
WorldCom's bond sale was 42 percent bigger than the previous
record corporate bond sale of $4.3 billion by Norfolk Southern
Corp. last year.
Even the increase in the sale wasn't enough to fill orders,
which some investors said totaled about $10 billion.
''The WorldCom deal is really getting everyone's
attention,'' said Chris Conkey, chief investment officer at
Keystone Investment Management in Boston, which has about $5
billion under management. ''It's an opportunity, given recent
credit spread weakness, to get into what we think will be a good
company.''
Bond Prices
WorldCom sold 30-year bonds in March 1997 at a yield spread
of 96 basis points more than Treasuries, making the 94 basis
point spread on new seven-year notes and 135 basis point spread
on 30-year bonds attractive to many investors.
The bonds sold with the following coupons, prices, yields to
maturity and spreads over Treasuries:
$1.5 billion of 6.125 percent three-year notes at 99.896 to
yield 6.163 percent, or 70 basis points over Treasuries ,
$600 million of 6.25 percent five-year notes at 99.978 to
yield 6.255 percent, or 83 basis points over,
$2.25 billion of 6.40 percent seven-year notes at 99.798 to
yield 6.436 percent, or 94 basis points over,
$1.75 billion of 6.95 percent 30-year bonds at 99.065 to
yield 7.025 percent, or 135 basis points over.
While this is at the wide end of preliminary yield targets,
investors say it matches recent changes in the corporate market.
The yield spread between investment grade corporate bonds and
Treasuries widened 3 basis points in the past week to 108 basis
points, according to a Merrill Lynch & Co. index.
Bucking the Trend
Demand for corporate debt, particularly junk-rated bonds,
weakened recently as investors worried Asia's fragile economies
won't recover soon enough to prevent a slowdown in the U.S. that
could hurt corporate profits and credit ratings. What's more, low
interest rates and big mergers have led to a record amount of
bond sales, overwhelming investors.
WorldCom's jumbo sale is the latest in a year when
companies have sold bonds at a record pace. Corporate bond sales
total about $556 billion so far this year, only about 2 percent
below the record sales of $569.4 billion for all of last year,
according to Securities Data Co.
''A very large money manager will love a deal like this
because they can buy it in size,'' said Closson Vaughan, who
oversees about $900 million of debt at Columbia Partners
Investment Management in Washington, D.C. Vaughan said he's not
buying any of the bonds, because he already owns MCI debt and has
more corporates than the benchmark against which his performance
is measured.
''We're a bit tentative'' about increasing our corporate
exposure, he said.
The sale was managed by Salomon Smith Barney with assistance
from Credit Suisse First Boston, Lehman Brothers, Chase
Securities Inc., J.P. Morgan Securities Inc., NationsBanc
Montgomery Securities and Utendahl Capital Partners LP.
--Kathleen Spillane and MaryAnn Busso in the New York newsroom
More News: WCOM |
