Selloff on WorldCom scandal creates some buying opportunities

By Ronda Fears

Nashville, Tenn., June 26 - Following a huge sell-off early Wednesday on the heels of the WorldCom, Inc. accounting scandal, which overshadowed Adelphia Communications Corp.'s anticlimactic bankruptcy filing, buyers swooped in to pick over the slaughtered remains of the market.

"It was a very tough day," said Jonathan Cohen, convertible analyst at Deutsche Bank Securities.

"There was a big slide and then a climb back out of the hole."

After an early exodus in all the telecom names, traders said there were buyers that emerged for AT&T, Sprint PCS-linked converts, RF Micro Devices and CommScope.

The big losers in the telecom group were Qwest, Lucent and Nortel as investors chose to exit any and all names with issues, accounting or otherwise.

For that matter, the exodus swept beyond telecom to names like SuperValu, El Paso, Tyco, Calpine, Lehman Brothers, Merrill Lynch and JPMorgan.

Banks and brokers were getting crushed largely due to their perceived heavy exposure to telecoms and much of the bleeding tech sector.

"Everything is being sold off," said Rao Aisola, head of convertible research at Bear Stearns & Co.

"In particular, any names with big debtloads got sold off. Truth in accounting is definitely an issue."

This will cause a lot of volatility, he said, and challenge investors' stock-picking abilities as well as credit work.

Investors are furious and frustrated, however, notwithstanding the issue of taking responsibility for their picks.

"We know that investing is a gamble. But you can't even begin to think about fraud and trying to not pick the names with criminals at the helm," said a convertible fund manager in Boston.

"It's like when you got to the blackjack table. You know the house is using six decks, or whatever, and you don't even think about whether they're using all 52 cards of each deck. You just assume everybody's above-board on some level. That's the way we've thought of SEC filings."

WorldCom's situation, much like Adelphia's, was one the market knew was a powder-keg, but the swiftness of the deterioration and the magnitude were unforeseen.

"That came out of left field," said John Seibel, head trader at Silverado Capital Management.

He said he finished selling nearly all his telecom holdings on Tuesday.

"I don't want to be a hero right now," Seibel said.

"My goal is not to make money, but to just not lose money. I'd rather have cash sitting on the sidelines than be losing it."

Some hedge funds were staying long Treasuries for shelter in the storm.

But many were trading volatility Wednesday and coming out ahead.

"Actually, I think we're going to make money today," said a convertible trader at a hedge fund in New Jersey.

"I wasn't holding any WorldCom or telecom. I sold it a while back. Not that we're not holding some paper that is hurting, but not much. We're long on Treasuries. So we're sitting tight."

Amidst the stir created by WorldCom, the long-expected bankruptcy filing by Adelphia was virtually unmentioned.

"That was a foregone conclusion, old news on a day like today," said a dealer.

But names with issues still up in the air, like Tyco, were seeing the bet go against them.

Tyco shares fell $1.58 to $11.97. The 0% convertibles plunged, with the 2020 issue falling 5.5 points to 57 bid, 57.5 asked and the 2021 issue losing 4.25 points to 65.25 bid, 65.75 asked.

The CIT Group initial public offering is set to price Monday, which is badly needed to help ease Tyco's debtload. But with its own accounting issues, and the recent scandal involving the former CEO's tax evasion charges, investors leaned toward exiting Tyco.

"People don't think the CIT deal is going forward," said Deutsche's Cohen.

"I think, though, the market was able to distinguish the difference between WorldCom and the rest of the world."

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