CLINTON, Miss. - WorldCom Corp. bondholders gave a vote of confidence to the telecommunications company's short-term debt, despite its downgrading to junk status by Moody's Investors Service.
"It's hard to imagine this company going bankrupt," said Stephen Kane, portfolio manager with Metropolitan West Asset Management LLC, Los Angeles, which has been buying up WorldCom debt since March.
On May 9, all of WorldCom's debt was branded with "junk" status after being downgraded by Moody's. Standard & Poor's already had labeled the firm a "CreditWatch with negative implications" on April 12.
WorldCom's short-term debt plunged in value after Moody's announced the downgrade, but bounced back after WorldCom officials reassured investors their financing was secure and they plan to conduct a major financial re-engineering of the company.
But bond managers still are shying away from WorldCom's long-term debt until the company's future is clearer. They fear that filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code will be the company's only option outside of selling itself.
"It's a difficult situation, but we think they're going to have the liquidity and ability to work with the banks, with all these bonds coming due in '03 and '04," said Michael Walbridge, principal at State Street Global Advisors, Boston. "The question is whether these guys will survive long term."
Peter Anderson, senior portfolio manager who oversees Philadelphia-based Delaware Investments' high-yield portfolio, said he's staying clear of WorldCom debt until things settle down. "I think it's very dangerous to be playing in any of the maturities right now because the facts haven't been fully disclosed yet."
What's more, Mr. Anderson said the high-yield bond market does not have the capacity to absorb the $32 billion of WorldCom debt being reclassified as junk. WorldCom debt would comprise between 5% and 8% of various high-yield indexes, making it the single largest issuer in that area and comparable to the size of entire sectors. That bodes poorly for the future value of the WorldCom bonds.
"Why would an investor want to get into it? It's so risky. Cooler heads will prevail once this whole thing has firmed up," he said.
WorldCom has been plagued by a plummeting stock price and controversy over a $366 million loan made to ex-Chief Executive Bernard J. Ebbers, who resigned April 29. The Securities and Exchange Commission is investigating the firm's accounting and other practices, according to observers.
WorldCom long-term bonds have not escaped the turmoil. At noon EDT on May 10, its 10-year bonds were priced at $46, vs. $102.40 on Dec. 31. Still, the long-term bonds rose about $2 the day after the downgrade.
Investors showed more faith in short-term WorldCom bonds after the downgrade. The price of a two-year security rose from $79 after the downgrade to $86 as of noon EDT on May 10.
One analyst suggested a confidence-building conference call built hopes for the bonds, while another suspected WorldCom's downgrade might have caused high-yield managers to begin snapping up bonds as they became available.
Moody's said WorldCom's gross adjusted debt now stands at $32 billion. Analysts are watching to see if the company is able to renew its credit lines.
Some investors unfazed
Not all WorldCom bondholders are in a panic.
"The Moody's downgrade doesn't change our view," MetWest's Mr. Kane said.
"We're very positive. Much of the hysteria surrounding WorldCom is overdone," he said in an interview prior to the downgrading. Although Mr. Kane declined to say how much WorldCom debt is held by MetWest, he said the amount is more than $100 million.
Even its defenders acknowledge WorldCom still has to pay for a series of acquisitions, including the $30 billion purchase of MCI Communications Corp.
Still, there are reasons to be bullish on the firm, according to some investors.
Mr. Kane said a common misperception is that WorldCom is primarily a consumer long-distance telephone provider, a business that has suffered from increased competition. What makes WorldCom an attractive holding to Mr. Kane is its business data services division, which only has one major competitor - AT&T Corp. - and accounts for 89.6% of WorldCom's revenues.
WorldCom also has a $12 billion cash pool from which it can draw, said Mr. Kane. The money comes from $8 billion in existing bank lines, $2 billion in sellable assets and a projected $2 billion to come from cash inflows over the next two years, he said.
Even though it downgraded WorldCom bonds, Moody's predicted WorldCom would be able to secure a $2.65 billion credit facility.
"It's not like (WorldCom) has to pull a rabbit out of its hat," said Mr. Kane.
Positive - for now
Other observers were upbeat about WorldCom in the short term, but have doubts about the company after 2003.
"I don't see a problem in the next 12 months," but WorldCom's health beyond mid-2003 is uncertain, said one analyst with a Boston-based money manager, who preferred not to be identified because of her working relationship with WorldCom.
She said WorldCom will begin to face additional competition to its long-distance phone and business services divisions.
Officials at Evergreen Asset Management, Charlotte, N.C., appear to have faith in WorldCom in the short term. Doug Williams, director of corporate credit research, said the manager owns a modest amount of short-term bonds, declining to give an amount. Yet Evergreen has sold a majority of its WorldCom long-term bonds in the past month, Mr. Williams said. He declined to say what the dollar value of those bonds were.
"The jury is still out (on WorldCom's future)," said Mr. Williams.
Some think WorldCom's long-term future is bleak.
"There is a 10% probability of complete recovery," said one credit analyst with a Boston money manager, who declined to be identified. He said the downgrading did not surprise him and that it would not change his position on WorldCom.
In addition, consolidation in the already small world of telecommunications companies could face a tough battle with federal regulators, who blocked WorldCom's 2000 merger attempt with Sprint Corp.
"We are very concerned about the volatility that this sector is experiencing," said Liz Schmid, spokeswoman for AEGON USA Investment Management Inc., Cedar Rapids, Iowa. The company was the third largest holder of WorldCom bonds at the close of the fourth quarter, according to research firm Capital Access International, Murray Hill, N.J. Ms. Schmid declined to make any comment regarding AEGON's outlook for WorldCom's future, new CEO John Sidgmore or what the manager will do with its WorldCom bonds.
However, AEGON's trading activities suggest the company is trying to back away from the telecommunications company. The value of AEGON's WorldCom bonds dropped to $200 million March 31 from about $339 million three months earlier. Ms. Schmid said. She added that the drop was the result of a combination of AEGON reducing its exposure to WorldCom bonds and the bonds' drop in value.