WorldCom stock sizzles but bonds fizzle on IDT offer as market breaks for Fourth

By Paul Deckelman and Paul A. Harris

New York, July 3 - WorldCom Inc. stock more than doubled in value in wild trading Wednesday, but bond players showed little response to the news that IDT Corp. had made an offer for some of the beleaguered telecommunications company's assets - possibly out of wariness and skepticism, but more likely out of sheer disinterest, with few players even in the junk market for the abbreviated pre-holiday session.

In primary side activity, Berry Plastics Corp. was heard by syndicate sources to be getting ready to hit the road Monday with its $275 million offering of ten-year senior subordinated notes.

Back in the secondary, people seemed mostly engaged in watching the clock ahead of the 2 p.m. ET close which The Bond Market Association had recommended ahead of the Independence Day holiday, which shuttered all U.S. financial markets on Thursday as well. The Association has also recommended a 2 p.m. ET close Friday.

With some lucky people at many shops taking advantage of what amounts to a five-day holiday weekend - how often does one of those come along? - activity levels were, understandably, low.

Junk players watched with some interest - and not a little wonder - at the sharp spike in WorldCom stock Wednesday, apparently spurred by IDT Corp.'s announcement Tuesday night that it would offer to buy some of the embattled WorldCom's assets.

The Newark, N.J-based company, which routinely buys assets from distressed telecom companies at fire-sale prices - it picked up the assets of the failed telecommers Winstar Communications and Teligent for a song last year - offered to buy WorldCom's MFS and Brooks Fiber units, as well as the consumer and small-business arms of its MCI long-distance unit. IDT is offering $5 billion for that package of assets. It said on Wednesday that it would unveil what it called a "WorldCom stabilization plan" on Friday, aimed at assuring the company's current customers that their service would continue uninterrupted, no matter what the financial or legal developments.

As of press time, WorldCom itself had said nothing one way or the other about the offer, while its banks may want to hang onto MCI themselves as collateral for any kind of financing in a restructuring scenario. But whether it actually ends up going anywhere, stock players certainly reacted enthusiastically. The news caused the stricken Clinton, Miss.-based telecom giant's shares to shoot up to 24 cents in intraday dealings - a 140% gain from their finish Tuesday at 10 cents a share. WorldCom came down from those peak levels, but not by much, finishing at 22 cents a share, a gain of 12 cents (120%) on Nasdaq volume of more than one billion shares, over 10 times the normal turnover. It was the third straight session in which share volume approached or topped one billion.

Bond players were considerably more restrained in their enthusiasm. A trader quoted WorldCom's bonds - which had firmed off earlier lows on Tuesday when recently appointed CEO John Sidgmore met with reporters to tell them that he planned to "get to the bottom" of the company's latest financial mess, involving the misstatement of nearly $4 billion of expenses - as having eased about half a point in light trading Wednesday from where they were after that news conference. However, he said, they were still up a point to a point and a half from where they were before Sidgmore began his exercise in damage control.

He saw WorldCom's 7 3/8% notes due 2003 at around the 17 bid/19 offered area, with its benchmark 7½% notes due 2011 at 14 bid/15 offered.

As to the big stock gain, he said, "I don't know if it is anything fundamental other than short covering - or maybe there are some people who don't know that stock goes to zero in a bankruptcy who are buying it as a speculative play. When a stock like that goes down to six cents on the dollar [WorldCom's closing level Monday, when it resumed trading for the first time after revealing its latest accounting problems] and the company is making some noise like it's still trying to avoid bankruptcy, you know what your downside is."

On Tuesday, Sidgmore had, in fact, noted that WorldCom had $2 billion of cash on hand and wasn't planning an imminent bankruptcy filing. He pointed out that WorldCom - already the Number-2 long-distance carrier in the U.S. - also carries much data traffic for the State and Defense Departments, as well as 70% percent of all e-mails in the U.S. and about half of all e-mails internationally - suggesting that the company is too big to be allowed to fail. While acknowledging that WorldCom is in default on some covenants of its credit agreements, he said that none of its lenders had moved to accelerate those loans, and further said that WorldCom remained in talks with its banks on ways to restructure its debt, and that he expected to get a proposal - or maybe even two - in a week or so.

"I have no (expletive) idea" why people are buying the WorldCom stock, one distressed-debt trader said in disbelief. "They actually haven't filed [for bankruptcy]. Maybe they think they're not going to and it'll come back."

He meantime saw the bonds still hanging in in the 14-15 area, "and quiet."

Another trader likewise observed WorldCom's 7½% notes remaining within their recent trading range - he quoted them up half a point, to the 14.5 bid/15.5 offered area, while its longer paper was bid in the 15-16 neighborhood.

MCI's bonds - which trade at a sizable premium to its corporate parent's on the assumption that MCI could be sold to a stronger owner in a reorganization - "got a better bid" in the wake of the IDT news, he said, quoting the notes as having tightened on the bid side to about 35 bid/36 offered from prior levels around 33 bid/36 offered. "Other than that, there wasn't much trading transpiring there."

Apart from WorldCom, Qwest Communications International Inc.'s bonds were being quoted lower after Moody's Investors Service placed Denver-based telecommunications company's ratings - including its Ba2 senior unsecured long-term rating - on review for a possible downgrade.

Moody's cited its "concerns about the company's market access and its consequent reliance on asset sales and accounts receivable securitizations for liquidity, as well as the potential negative effects of the SEC investigation into the company's past accounting practices on revenues."

While Qwest shares traded lower Wednesday - down 23 cents (11.92%) in New York Stock Exchange dealings, to $1.70, on volume of 30.9 million shares, more than double the usual volume - it's bonds "just don't trade," the trader said. "They were offered without a bid, pretty much. There's some wide markets on some of the longer paper, but there's really not much happening." He heard the Qwest 6 7/8% bonds due 2028, which had fallen from recent levels as high as 66-68 to hold in a 50-52 context over the past couple of sessions, quoted Wednesday being offered in a 45-50 context, "with nobody really selling. It's all gravitating lower."

"We were watching it widen out, with not much activity. That was pretty much the crux of the day."

An observer at another desk agreed that Qwest's levels Wednesday "seemed consistent" with where they had already been trading. "It was very quiet - there was no further downward movement," despite the Moody's downgrade warning.

And he saw AT&T Wireless's bonds actually quoted lower -some issues by as much as five points - despite market buzz that rival wireless giant Cingular might announce a bid for AT&T Wireless. Cingular has been mentioned in market rumors in recent weeks as a possible suitor for the company, whose shares jumped 75 cents (14.97%) to $5.76 on the NYSE Wednesday. But the bonds were quoted as having eased to levels around 70 bid/72 offered for its 8¾% bonds due 2031, 77 bid/79 offered for its 8 1/8% notes due 2012 and 80.75 bid for its 7.35% notes due 2006.

Elsewhere in the telecom world, a trader saw Level 3 Communications Inc. and Nextel Communications Inc. debt "pretty much hanging in there " at recent levels - the mid-to-high 30s for Level 3's benchmark 9 1/8% senior notes due 2008 and around 50 for Nextel's 9 3/8% senior notes due 2009.

Generally, trading was extremely thin; but with stocks remaining on the slide for most of the day before their late rally and a long holiday weekend yawning, a number of issues were quoted well down, including Loral Orion Inc.'s 10% notes due 2006, down eight points on the session, at 60; its parent company, Loral Space & Communications Ltd., on Tuesday lowered its guidance for 2002; it now projects EBITDA to fall about 5% from last year's $233 million total, versus earlier estimates of a 15% rise for the year, which would have brought the cash-flow measure to about $270 million. Loral also said that its revenues would rise 15%, to $1.2 billion, although the company had earlier estimated a 20% gain.

The New York-based maker of communications satellites also projects a net loss for the year of $190 million (50 cents per share), before a previously reported first-quarter goodwill charge, versus $276 million (86 cents per share) last year. The company had previously expected to post a per-share loss of between 40 and 50 cents. It further warned that it would not be able to achieve profitability in late 2003 as previously forecast.

Satellite broadcaster EchoStar DBS Inc.'s bonds were quoted lower, its 9 3/8% notes due 2009 seen down more than five points to 87.5 bid, albeit in light trading; the Federal Communications Commission on Tuesday announced that it had revoked the Colorado-based company's license to sell Internet access, data and telephone service in the high-frequency Ka band of the radio-frequency spectrum, claiming EchoStar had not ensured that a satellite it is building - with Loral, by the way - will work in that band. ExchoStar promised to fight the federal directive.

Xerox Corp.'s 6.1% notes due 2003 were quoted seven points down, around the 80 bid level; the Fitch ratings service on Wednesday downgraded the company's senior unsecured debt rating to BB- from BB previously, and said its rating outlook remains negative.

The ratings downgrade was not the only bad news for the Stamford, Conn.-based copier and office machines giant; it disclosed in a filing with the Securities and Exchange Commission that its 68%-owned Indian unit, Xerox Modicorp Ltd., had made "improper payments" over "a period of years" to secure government contracts, Xerox said in a filing to the U.S. Securities and Exchange Commission. Xerox said that it had ordered the practice stopped as soon as it became aware of it.

On Tuesday, the company - which last week said it would restate more than $6 billion of equipment revenues which had been improperly categorized or accelerated - was sued by an employee contending that the company misled its workforce about the soundness of its stock, causing them to lose millions of dollars from their retirement plans. The action charges that senior company executives misled employees into buying Xerox stock as part of their 401(k) plans - knowing all the while that Xerox had artificially inflated its revenues by the questionable accounting tactics. Attorneys filing the suit are seeking class-action status, in order to represent at least 50,000 retired Xerox workers who saw the shares plunge from highs of more than $60 to current lows. Xerox shares closed Wednesday on the NYSE down 51 cents (7.79%) at $6.04.

In the primary, the rugged run-up to the Independence Day break concluded with Wednesday's abbreviated session producing one mere morsel of news: Berry Plastics, already known to be in the market, will start a roadshow on Monday.

Meanwhile, throughout the week of July 1 sources on both the buy- and sell-sides told Prospect News that the negative news affecting other capital markets has unmistakably spilled over into high yield.

Evidence of this, sources say, surfaced in earnest on Friday June 28, when only three of six anticipated transactions were completed. And all three of those were priced as downsized offerings with yields that came wide of the official price talk.

Going out with price talk of 9% area Los Angeles-based Hispanic broadcaster LBI Media, Inc. decreased its offering to $150 million from $200 million and priced the 10-year senior subordinated notes (B3/B-) at par to yield 10 1/8%.

The price talk was 12¼%-12½%, meanwhile, on D&B Acquisition Sub, Inc.'s $155 of seven-year senior secured notes (B2/B), which priced at 96.620 to yield 13%. The issuer, a vehicle for Dave & Busters, downsized its offering from $165 million.

Finally, on Friday June 28- in the wake of oil and gas exploration and production companies that priced junk bonds with seven- and eight-handles throughout the spring - Plains Exploration & Production Co. LP brought $250 million of 10-year senior subordinated notes deal (B2/B). The price talk was 8½%-8¾%. The offering was downsized by $50 million and the notes priced at 98.376 to yield 9%.

The remaining three deals were bumped onto the forward calendar as business to be transacted during the week of July 1. Late in Wednesday's session two of them appeared to remain parked there.

The market sentiment that greeted LBI Media, Dave and Busters and Plains hardly improved in the ensuing days. On Tuesday, July 2, one of the three deals carried over from the last week of June, SOI Funding Corp. - issuing on behalf of Solutia, Inc. - came before investors. And those investors seemed to be calling the shots.

Solutia, which was concurrently attempting to price $250 million of junk bonds and close on a new credit facility, had an urgent need for capital and paid what sources say was a handsome price to get it.

On Tuesday the St. Louis chemical company, which was spun off from Monsanto, priced a downsized offering of $200 million. It was comprised of 223,000 units of one $1,000 senior secured note and one warrant. Having announced 12% area price talk, the Solutia notes were discounted to a price of 89.992 and yielded 13½%.

Liesl Livingston, Solutia's director of investor relations, told Prospect News shortly after the deal priced that even though the completed bond and warrants deal does not guarantee that the credit facility will be closed (two of the 16 banks on the facility were still holding out, late Tuesday) the company was happy to have the transaction completed.

She added that investors seemed to express greatest concern over the lawsuit that seeks damages on behalf of 3,600 people who lived in or visited an area in Anniston, Ala., where a Monsanto Co. plant made polychlorinated biphenyls, or PCBs, for decades.

Monsanto, which is now a food and biotechnology company based in St. Louis, sold its chemical business in 1997, forming Solutia, which is also headquartered in St. Louis.

"There is also lack of clarity around our PCB issues, just because we've been in trials for so many months, and it doesn't seem to be coming to resolution," Livingston said. "And that's obviously an issue for some folks."

As to the other deals carried over from the end of the last week in June, Gristede's Foods, Inc.'s $175 million of 10-year senior notes (B2/B+) via Deutsche Bank Securities Inc. and Jefferies & Co. (price talk 11%-11¼%), and Workflow Management, Inc.'s $170 million of senior secured notes, also B2/B+ via Jefferies & Co. both reportedly remained as pending business at Wednesday's close.

One buy-side source, speaking on background Wednesday, told Prospect News that the for several reasons - not least of which is the negative sentiment that has taken hold throughout the capital markets - the sidelines are not the worst place for an investor to be.

"If you think that interest rates are going to go up later on," this source said, "you certainly don't want to lock into a 10-year deal right now.

"We've been on the sidelines, and we're going to continue to wait."

As to the only primary market news on Wednesday, timing emerged on the Berry Plastics Corp.'s offering of $275 million of 10-year senior subordinated notes (B3/B-), via JP Morgan and Goldman Sachs & Co. The roadshow for the Indiana-based injection mold plastics company's new notes starts Monday, with pricing expected on July 17.

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