WorldCom bounces, especially in MCI, Intermedia issues; third straight fund outflow

By Paul Deckelman and Paul A. Harris

New York, June 27 - WorldCom Inc.'s debt spent Thursday bouncing off the lows to which it had plummeted in Wednesday's hectic trading, as market players acclimated themselves to the surprising revelations earlier this week of massive apparent accounting fraud at the troubled telecommunications giant. The bonds of the company's MCI and Intermedia Communications subsidiaries continued to trade at a premium to the parent company's shell-shocked paper.

In the primary market, players already made nervous by WorldCom's shocking meltdown - by some accounts, its bonds lost as much as $7.6 billion of market value on Wednesday - mostly hugged the sidelines Thursday, awaiting the verdict from mutual fund investors, whose net inflows and outflows are considered by many to be an accurate gauge of overall junk market liquidity trends.

Sure enough, they got such a verdict, with market sources reporting that the weekly high yield mutual fund flow numbers compiled by AMG Data Services showed a $158 million net outflow in the week ended Wednesday - the third consecutive week in which more money flowed out of the junk funds than came into them. In the week ended June 19, the funds hemorrhaged to the tune of $504.3 million, and the outflow was $292.2 million in the week ended June 12.

Over the last three weeks, outflows have totaled a massive $954 million. While the net inflows for the year remain overwhelmingly positive - inflows have been seen in 18 of the 26 weeks since the start of the year, totaling $4.49 billion, according to a summary of the AMG data compiled by Prospect News - the three-week losing streak knocks the total well down from peak levels of above $5.6 billion seen during the spring, and momentum seems to have clearly shifted in a negative direction.

Otherwise the primary market was quiet with just one deal pricing, from CP Ships, Ltd.

In the secondary sphere, WorldCom remained the focus of much of the market's activity Thursday, with one trader calling it "clearly the day's big mover." He saw the embattled Clinton, Miss.-based telecom giant's bonds firming a bit after having collapsed on Wednesday in response to the company's admissions that it had improperly accounted for as much as $3.4 billion of expenses by characterizing them as capital expenditures rather than operating costs, thus artificially pumping up its cash flow and overall profit numbers in 2001 and the first quarter of this year. WorldCom said it would restate those figures - a restatement which is expected to be the largest in U.S. corporate history, far eclipsing, say, the restatement's Enron Corp. issued after its revelations last year of numerous off-balance sheet partnership transactions.

The trader saw WorldCom's benchmark 7½% senior notes due 2011 - which fell to a close around 11 bid Wednesday from prior levels in the lower 40s - as having opened in an 11.5 bid/13 offered context, then having pushed up to the 15-17 area, before going home slightly off those peak levels at 14.5 bid/15.5 offered. He saw its 6½% notes due 2004 and 6.40% notes due 2005 about a point better in each case.

MCI paper, meanwhile, "had a really good bid to it," it's 7½% notes due 2004 and 6½% notes due 2010 firming three points on the day to 26 bid. Intermedia - bought just a year ago by WorldCom to cap off the spending spree that helped to build the former long-distance reseller into the Number-2 U.S. long distance firm with significant interests elsewhere in telecom as well - "was definitely moving up" Thursday, he said, its bonds bid around 30-31. "There was some activity there as well."

At another desk, a distressed-debt trader likewise saw WorldCom better on the day, on "a fair amount of trading - not nearly as much as [Wednesday], but [Wednesday] was one for the record books. There was decent flow trading."

From his vantage point, "the investment grade guys were selling it and the distressed guys buying it. There was a little less supply and a little more demand [than Wednesday] and so there were better buyers, with what he termed "the generic stuff" - WorldCom's intermediate and long-term bonds - having moved up to closing bid levels around 15 to 16 from Wednesday's finish around 12. The shorter-term WorldCom paper, such as its bonds maturing in May 2003, was trading a little higher than the longer debt, although he noted that it "had collapsed versus the generic stuff" when the short paper plunged to levels in the upper teens from prior levels as high as the 70s, while the fall to the lower teens from the 40s was not as great for the intermediate and longer-term WorldCom bonds.

The holders of the shorter paper, he continued "are concerned that if they decide to file for bankruptcy sooner rather than later - and with the fraud allegations against them, they probably should - then all of that paper will be trading at exactly the same level."

The MCI paper, more senior than the plain-vanilla WorldCom issues was in the high 20s, he said, and Intermedia - holding "a big inter-company note "- was in the low 30s. At another desk, Intermedia's zero-coupon/12¼% notes due 2011 were quoted at 30.5, with "better buyers there as well."

Elsewhere in the telecom world, Qwest Communications International Inc.'s bonds "were really active, going back and forth," the trader said. "It was weaker in the morning, with investment-grade sellers panicking, thinking Qwest would be the next telecom to announce fraudulent accounting or that the assets weren't there and there never was a phone company. Then later, the distressed guys were buying, so its long and intermediate paper was going out mostly unchanged on the day, but better than its earlier lows." While the Qwest Capital Funding holding company bonds continued to struggle, he said, there were more buyers for its operating company paper, "which was perceived to be money-good, no matter what."

A market source, on the other hand, saw Qwest's holding company debt lower Thursday, its 5 7/8% notes due 2004 dipping to 57 bid and its 7¾% notes due 2006 at 53 bid; both were well below recent levels at 71 bid and 62 bid, respectively. On the longer end, he quoted Qwest's 7¼% notes due 2011 at 50 bid, down 12 points, and its 7¾% notes due 2031 off five points to 47 bid.

Nextel Communications Inc.'s bonds "have been taking it on the chin" the past two sessions on telecom sector jitters in the light of the WorldCom bloodbath, a trader said, quoting its benchmark 9 3/8% senior notes due 2009 in the 49-50 bid context, down a bit from Wednesday's close in the 50-51 area, which had represented a seven-point fall from Tuesday's finish in the upper 50s. Level 3 Communications Inc.'s 9 1/8% senior notes due 2009, which also fell about seven points Wednesday to the 35.5 bid region, remained there Thursday.

Adelphia Communications Corp., whose anticlimactic bankruptcy filing late Tuesday was all but overshadowed by the more dramatic developments enveloping WorldCom, was seen a bit lower Thursday, its 10 7/8% and 10¼% notes down two points to around 42 bid and its Century Communications Corp.'s 9½% notes due 2005 a point lower at 35.

Rival cabler Charter Communications - which was sharply lower Wednesday on investor angst over the cable sector arising from Adelphia's problems - again "got crushed" on Thursday, one observer said, quoting the company's 8¼% notes due 2007, which had fallen to 70 bid on Wednesday from the mid-70s previously, as losing six more points Thursday to end at 64 bid, while its 8 5/8% notes due 2009 closed at 65, down 3 points. Its 9.29% notes due 2011 closed at 45 bid, well down from Wednesday's finish at 50.5. Meantime, Cablevision's CSC Holdings Inc. 8 1/8% notes due 2009 were being quoted in the lower 80s from prior levels around 90.

Echostar DBS Corp.'s bonds were lower, in line with early weakness in its stock sparked, Lehman Brothers said, by investor concern about satellite's proximity to rival technology cable, which is now being battered soundly, and by Echostar's own prior relationship with troubled auditor Arthur Andersen and lease-model accounting of some of its subsidiaries. Lehman said later in the day that although these were feeding investor fears about possible accounting irregularities, it considered that possibility highly unlikely. That big vote of confidence from Lehman helped Echostar's shares to stage a late rally and firm smartly off its day's lows around $13.41 to actually end the day up 27 cents (1.59%) at $17.26, on Nasdaq volume of 34 million shares, about 11 times normal. Its bonds, however, did not benefit from that comeback; Echostar's 9¼% notes due 2006 dropped to 93.75 bid from prior levels around 96, while its 10 3/8% notes due 2007 were three points lower, at 95 bid. Its 9 3/8% notes due 2009 were two points lower, at 94.

Outside of the communications area, CMS Energy - whose shares fell $1.75 (13.7%) on Wednesday after the Michigan-based energy generator announced the restructuring of its energy marketing unit and lowered its earnings forecast for the year, and then lost another 54 cents (4.91%) Thursday to close at $10.46 following the resignation late Wednesday of senior vice president and general counsel Rodger Kerschner, was also lower on the bond side. Its 7½% notes due 2009 were quoted two points lower, at 75, while its 9 7/8% notes due 2007 were quoted as having fallen to 76 bid from levels earlier in the week around 85.

In the primary, relative quiet prevailed, much as it had done on Wednesday. The only reported transaction came from CP Ship.

Although the deal was originally announced as an offering of $250 million, the London container ship company set sail late Thursday with only $200 million in the hold. That's the size of the 10-year senior notes deal (Ba3/BB+) that priced at 97.722 with a yield of 10¾%, according to a syndicate source. Price talk had been for a yield in the 10% area.

Diane Keefe, portfolio manager of the Pax World High Yield Fund, told Prospect News, Thursday, that she had taken a look at the CP Ships deal, but in the end she decided to wave from the dock.

"We took a close look and decided to pass because of the free cash flow-negative situation that they're in for the next couple of years," Keefe said. "We decided that it didn't make sense.

"Also there's a statistic on one of their charts that says the ship rates per day were running at $23,000 during the heyday. And the long-term cost was $13,000. Now they're running at $7,000. That says a lot. They're expecting a cyclical rebound but they're way below what it costs to operate these things, at this point.

"So even though their leverage is low they're still in a tough situation from a fundamental point of view."

When Prospect News mentioned the "W"-word to the Pax World PM on Thursday she breathed a muted sigh of relief.

"Luckily I did not own Qwest or WorldCom," Keefe said. "Everybody took big hits yesterday. Nextel traded down. Charter traded down. Cablevision traded down. Those were my biggest losers.

"There was nothing specific on those companies that caused them to trade down. It's just market inclination to sell what you can sell when things are bad."

The follow-up question: What impact will the behemoth blow-up announced June 26 likely have on the high-yield primary market?

"I think there's a lot of cash to put to work," she allowed, "But when 30% of the things in your portfolio just got cheaper, everything gets cheaper. Everything you look at has to be gauged on what you could buy in the secondary."

An assortment of credits on the forward calendar presently fail to pass the social screens to which the Pax World High Yield Fund submits the companies in which it invests. Among them, Keefe said, are Plains Exploration (price talk 8½%-8¾%) and Solutia (price talk 12½% area), which are poised to price Friday

However, of the six deals expected to price on the last day of the week of June 24, Keefe specified that the Pax World High Yield Fund was taking a look at three:

Dallas upscale restaurant and entertainment co. Dave & Busters, which is bringing $165 million of seven-year senior secured notes (B2/B) via UBS Warburg and Deutsche Bank Securities Inc., is one of them.

"I've done some work on Dave & Busters," Keefe said. "It's video games and simulations and shuffleboard and you name it.

"The lease-adjusted leverage is high so they're going to have to put a big coupon on it to get done."

Price talk is 12¼%-12½% on Dave & Busters.

Stating that she had played the upsized Roundy's deal which priced May 23, Keefe said that she was also having a look at Gristede's Foods, Inc. $175 million of 10-year senior notes (B2/B+), via Deutsche and Jefferies & Co. (price talk 11%-11¼%).

Back in the late winter Keefe told Prospect News that she had played Spanish language broadcaster Entravision Communications Corp. which priced an upsized offering of $225 million on March 12.

And she disclosed that she was also looking at the Spanish language broadcast operation currently in the junk bond market, LBI Media. Its $200 million 10-year senior subordinated notes (B3/B-) via Credit Suisse First Boston and UBS Warburg were talked Thursday at 9% area.

"It has a lot higher leverage than Entravision," Keefe commented. "It's more aggressive."

The six deals that are expected to price Friday total $1.21 billion, following which there are no more announced offerings expected to price prior to the July 4 holiday.

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