Can anyone explane what this bond stuff means? I have LVLT stock and am not surre if the little statement about LVLT is good News or Bad News for LVLT. Help Please
NEW YORK (Reuters) - WorldCom Inc. (NasdaqNM:WCOM - news) bond investors are convinced the company is more likely to default on its bonds than make all interest and principal payments.
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Prices of WorldCom's 10- and 30-year bonds plummeted 10 cents on the dollar on Monday to below 50 cents, and some of its bonds now yield 35 percent. WorldCom shares sank 28 percent on Monday to an all-time closing low. Volume topped 260 million shares, accounting for 15 percent of all trading on Nasdaq.
The No. 2 U.S. long-distance telephone company's bonds and shares have plummeted on fears over WorldCom's ability to meet debt payments, amid a telecommunications market buffeted in a weak economy by price wars, excess capacity, reduced customer spending and probes by securities regulators.
Some analysts believe a bond price below 50 cents on the dollar suggests investors consider default more likely than recovery.
It also shows investors expect WorldCom's credit ratings, cut last week to two notches above "junk" status, will follow those of Lucent Technologies Inc. (NYSE:LU - news) to junk.
"When you see a bond drop that precipitously, the market is telling you that default is a real possibility," said Eric Tutterow, a Chicago-based analyst for high-yield research firm KDP Investment Advisors.
WorldCom said last week it has enough cash to pay its debts, and could sell about $2 billion of assets to raise cash if needed. This month it posted a 78 percent drop in first quarter profits to $130 million, and cut projected earnings before interest, taxes, depreciation and amortization as much as 18 percent to between $7 billion and $7.5 billion.
The Clinton, Mississippi-based company also faces a Securities and Exchange Commission probe over accounting and over loans it made to Chief Executive Bernard Ebbers. WorldCom did not on Monday immediately return calls seeking comment.
WorldCom shares closed down 92 cents at $2.35, after earlier falling to $2.20. They have fallen 96 percent from a split-adjusted high of $64.51 in June 1999. They began the year at $14.08.
YIELDS SOAR, BANKRUPTCY FEARED
WorldCom's $4 billion of 7.5 percent notes maturing in 2011 were bid Monday at 48 cents on the dollar, and its $4.6 billion of 8.25 percent bonds maturing in 2031 at 46 cents.
Those correspond to yields to maturity of 20.27 percent and 18.07 percent, equivalent to a respective 12.55 and 12.45 percentage points more than similar maturity U.S. Treasuries. The 10-year notes yielded 7.9 percent three months ago.
A corporate bond that yields 10 percentage points more than Treasuries is "distressed," according to Merrill Lynch & Co.
"WorldCom is trading like a 'single-B' credit," a medium junk grade, said Cindy Cole, who helps invest $5 billion for National City Investment Management Co. in Cleveland, which has a "very small position" in WorldCom bonds.
Moody's Investors Service rates WorldCom senior debt "Baa2," while Standard & Poor's rates it "BBB." Both warned that further cuts are possible.
WorldCom's 6.5 percent notes maturing in 2004 were bid Monday at 60.5 cents on the dollar to yield 35.29 percent.
That's almost 50 percent above the 23.94 percent average yield in the "junk" telecom bond sector, Merrill Lynch said.
In comparison, fiber-optic network provider Level 3 Communications Inc.'s (NasdaqNM:LVLT - news) 9.125 percent notes maturing in 2008, rated 10 notches lower at "Caa3" by Moody's and "CCC-minus" by S&P, recently yielded just 26.88 percent.
"The equity market is looking to the bond market, and the bond market is questioning whether WorldCom is viable in the long term," said Patrick Comack, an analyst at Guzman & Co. who has a "sell" rating on WorldCom.
"Some people are actually betting WorldCom is going to go bankrupt, maybe in 2003 or 2004," he added.
BIG BORROWER
WorldCom is the No. 10 U.S. corporate bond issuer with $22 billion of bonds outstanding as of March 31, according to Lehman Brothers Inc.
The company has about $872 million of debt maturing this year, $3.25 billion in 2003 and $2.6 billion in 2004, according to fixed-income research service CreditSights Inc. It also has a $2.65 billion credit line that expires in June.
Tutterow said some junk bond investors own WorldCom bonds, "but there doesn't seem to be much interest in adding more."
Cole, said investment-grade bond investors may be selling the bonds if they expect a downgrade to junk.
"It may be an overreaction because WorldCom has significant assets," she said. "Time will tell."
(Additional reporting by Ben Klayman in Chicago.)
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