Market doubts grow with WorldCom, pushing lenders to use extra caution, Fitch says

By Sara Rosenberg

New York June 28 - WorldCom, Inc.'s accounting troubles could give an extra push to forces that might raise the cost and reduce the availability of bank credit, Fitch Ratings said Friday.

"The WorldCom situation has also added increased uncertainty into markets that have already been rocked by the rapid and unforeseen decline of other major corporations," Fitch said in a report on the impact of the developments at WorldCom on banks. "The skepticism surrounding financial reporting and disclosure is increasing, particularly in the US."

Not only are the companies feeling the new market attitude, so are the investment banking firms that have helped these companies access the debt and equity markets, according to Fitch.

Although no current rating or rating outlook changes are presently required on major global commercial and investment banks due to exposure to WorldCom, lenders will remain cautious until confidence returns, carefully considering the cost of credit and the speed in which credit is made available, Fitch said.

Furthermore, the volume of debt and equity transactions is expected to experience market pressure, which over a prolonged period of time could hurt business flows and the overall credit profile of commercial and investment banks, Fitch said.

Banks are not expected to be severely affected by WorldCom since bank debt makes up a small portion of the company's total obligations, the majority of the company's bank debt is untapped and lead banks effectively used loan syndication and credit derivatives to manage exposures, Fitch explained.

It is estimated that of the $2.65 billion in drawn bank lines, the largest banks in North America, Western Europe and Japan account for approximately $2.2 billion, Fitch said. North America is estimated to account for $600 million, Japan accounts for $300 million and Western Europe accounts for $1.3 billion.

"From a ratings perspective, Fitch is more concerned with the overall trend in corporate credit quality, which is deteriorating and is expected to decline further in 2002. Non-performing loans have increased and downward migration in internal risk grades suggests further deterioration and increased losses are to be expected," Fitch said.

"Industries such as the telecommunications sector are producing higher than expected losses on individual credits, which is making it increasingly difficult for banks to maintain strong capital and reserves that have been critical to the ratings stability in the country."

Under Fitch's assessment of the situation, the rating agency assumed that WorldCom is prevented from accessing credit lines that were previously available and undrawn prior to the accounting problems announcement. Fitch also assumed that $1.5 billion of credit provided through asset-backed commercial paper conduits will be serviced through continued performance of underlying collateral and other structural protection factors.

While bank ratings are not expected to feel the affect of WorldCom, some CDOs were not as lucky. Fitch placed 15 CDOs on Rating Watch Negative because they have one or more debt tranches sufficiently exposed to warrant placement.

"In most cases, these CDOs had already experienced some erosion of collateral credit quality, thereby increasing the impact of their WorldCom exposure," Fitch added.

In total, about 70 CDOs were identified as being exposed to WorldCom with total exposure of $570 million, Fitch said. The exposure per transaction ranges from $70 million to less than $1 million, with an average exposure of slightly higher than $8 million.

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