WorldCom staggers lower from rivals' accusations; USG and Federal Mogul drop on dismal earnings

By Carlise Newman

Chicago, July 29 - WorldCom Inc. was the name of the day again on Tuesday in distressed trading, with the company still reeling from accusations of rerouting telephone calls through Canada as a way to avoid tariffs owed to other telecom companies for use of their networks.

The rerouting practice is said to have been going on for 10 years but the charges only surfaced in the last 10 weeks when a former WorldCom employee alerted the FBI about a company project known as "Canadian Gateway," according to various news reports, starting with one in The New York Times on Sunday.

The bonds dropped a point, for a total of four points from Friday.

"The bonds traded in big volumes in the 27 bid, 28 offered range early in the day. It was all we did today," a trader said. They closed a point lower at 26 bid, 27 offered, he said.

On Monday, WorldCom's bonds dropped two points to 29¾ bid, 30¾ offered from where they had been trading at levels at 31¾ bid, 32¾ offered on Friday, traders said.

Many of WorldCom's rivals have charged that bankruptcy gave MCI an unfair advantage and that it should be liquidated rather than revived.

Rerouting calls through Canada allegedly allowed WorldCom to send them back into the U.S. on AT&T's network. Therefore AT&T would pay carrying charges that should have been paid by WorldCom.

Rerouting calls through Canada allegedly allowed WorldCom to send them back into the U.S. on AT&T's network. Therefore AT&T would pay connection charges that should have been paid by WorldCom.

In a statement late Monday, Michael D. Capellas, WorldCom's chairman and chief executive officer, said it would cooperate fully with the U.S. Attorneys Office's investigation and carry out its own internal analysis.

"As I have said all along, we will do the right thing," Capellas added. "We have a zero-tolerance policy and if any wrongdoing is discovered you can be certain that we will take appropriate action swiftly."

A trader noted that late Friday Allegiance Telecom Inc. postponed its annual stockholder's meeting, previously scheduled for Tuesday - although he saw little reaction.

"Perhaps it was due to the market being focused on the WorldCom bonds - we didn't see any active trading in these bonds either," he added.

In earnings news, USG Corp. on Tuesday reported lower quarterly profit, hurt by higher energy and employee benefit costs, the Chicago-based buildings materials manufacturer said.

USG reported second-quarter profits of $31 million, compared with $48 million a year earlier. Net sales rose to $914 million from $885 million.

USG's 8½% notes due 2005 were seen down at 13 bid, 14 offered.

"A big percentage drop. They fell about four points," he said.

Net earnings for the current six months include a non-cash after-tax charge of $16 million and $96 million related to the changed in accounting standards. Earnings before the accounting changes were $53 million for the first half of 2003 and $74 million for the first half of 2002.

Meanwhile, Federal-Mogul Corp. posted a quarterly loss, citing expenses related to its bankruptcy reorganization, and said it expects to emerge from bankruptcy protection next year.

The company said it had a net loss of $5 million in the second quarter, compared with a profit of $16 million a year ago.

The auto parts maker's 7½% notes due 2009 at were seen at 15 bid, 16 offered, a trader said, a drop of "about two points from where I last saw them. We haven't traded those bonds in quite a while."

Sales rose to $1.45 billion from $1.44 billion. Minus the impact of divestitures and the weak dollar, which makes revenues generated overseas worth more when converted into dollars, sales would have been down 5%.

The Southfield, Mich.-based company said operating cash flow in the quarter improved to $168 million from $75 million.

Elsewhere, "Enron was hopping," a trader said, as "people are trying to figure out what went on behind the scenes."

He said the Enron bonds were seen at 18 bid, 20 offered, a drop of about two points, and actively trading at the 18¾ bid level.

On Monday, Citigroup Inc. and J.P. Morgan Chase & Co. agreed to pay a combined $255 million to the SEC to settle allegations about their responsibilities for Enron's downfall, the SEC said in a news release Monday.

The settlement calls for J.P. Morgan, the second largest U.S. bank by assets, to pay $135 million and Citigroup, the largest, to pay $120 million. It will allow the banks to avoid prosecution but force them to alter some business practices.

The money will be put into a fund for victims of fraud at Dynegy and Enron. In addition, the banks will each pay another $25 million to be split between New York State and New York City, bringing the combined payout to $305 million.

Oregon Steel Mills Inc.'s bonds slipped after an announcement that effective July 31, Joe Corvin will step down as the president and chief executive officer and as a director of the company.

Oregon's 10% notes due 2009 "fell as low as the 75 bid area," which was a 5-point drop, but were heard to be rebounding later in the day to 77 bid.

The Portland, Ore.-based steelmaker said Corvin resigned in order to pursue other interests. The board of directors plans to appoint a successor at its upcoming board meeting on Thursday. In the interim, chairman William Swindells will assume the roles of president and CEO.

The company's bonds had been down five points on Monday after it postponed its earnings conference call scheduled for Friday.

In other news, Adelphia Communications Corp. maintained its position as always active. The 9 7/8% notes due 2006 were up two points at 38 bid, a trader said.

New York satellite operator Loral Space and Communications Inc.'s 10% notes due 2006 were down 1½ points to 61 bid. Loral, which filed for bankruptcy protection this month, had been very active and climbed higher after announcing the bankruptcy filing.

Also moving was Telewest Communications plc, "not typically active," a trader said. He saw its 9 5/8% notes due 2006 up two points at 38 bid.

Telewest is scheduled to report earnings on Thursday.

On Monday Telewest confirmed that its discussions with bondholders on the terms of its proposed financial restructuring would give shareholders 1.5% of the issued share capital following the restructuring.

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