S&P Cuts WorldCom Bonds to Junk

Stocks and bonds of troubled WorldCom Inc. (WCOM) took a beating for a second day in a row Friday, after a third major bond rating agency downgraded the company's credit rating to junk status. 

"We've had a rapid decline. People have been whipsawed," said Brad Dyslin, an analyst at Principal Capital Income Investors in Des Moines, Iowa, which manages $40 billion in bonds. 

WorldCom's financial struggle reflects the turmoil being felt by $108 billion U.S. long-distance telephone industry. 

"Long distance is going through a secular change. It's going away like the buggy whip," Dyslin said. 

Standard & Poor's cut WorldCom's debt and may lower its ratings further, which would raise the company's borrowing costs, after Moody's Investors Service and Fitch Ratings slapped WorldCom's over $30 billion in outstanding debt into junk status on Thursday. 

S&P lowered the long-term corporate credit rating of WorldCom, the No. 2 U.S. long distance phone and data provider, to "BB," S&P's second highest junk rating, from "BBB," as a result of deteriorating operating performance, heavy debt loan and expectations of further weakness. 

Moreover, S&P cut the short-term corporate credit rating on the Clinton, Mississippi-based company to "B" from "A-3." Its stock slipped another 20 percent on Friday on the Nasdaq, or by 41 cents, to close at $1.60 a share. 

WorldCom's 7.5 percent notes maturing in May 2011 fell 2 cents on the dollar to 43 cents, pushing its yield up to 22.56 percent. Its 8.25 percent bonds maturing in May 2031 fell a penny to 39 cents, and yield 21.25 percent. 

"The significant deterioration in the company's financial condition has resulted from a continued weakening of WorldCom's business position, which, in turn, will limit the company's ability to reduce debt leverage," S&P credit analyst Richard Siderman said in a statement. "The downgrade and CreditWatch listing also reflect concerns regarding liquidity beyond the near-term." 


The beleaguered WorldCom received a reprieve from its banks and creditors who recently granted waivers on the company's accounts receivable securitization program and prospects for a renegotiated credit line. 

While the revision of the terms of the asset securitization program prevented WorldCom from facing a crunch in working capital, the program has nevertheless been downsized, which will require a cash outlay of about $400 million when the new terms take effect on May 23, S&P said. 

The company has indicated that it expects it will be able to put in place a longer-term, secured bank credit line within the next month, suggesting more surety regarding its liquidity because $2.65 billion of bank lines, which expires June 7, are scheduled to term out in June 2003. 

In face of the downgrades in the past 24 hours, WorldCom executives sought to reassure investors by saying that it could cut another $1 billion in planned investment and sell assets to shore up its balance sheet. 

Despite a window to improve its short-term liquidity, WorldCom faces formidable long-term challenges including a weak economy, continuing downward pressure on the profit margin of its residential long distance business and likely emergence of the regional telephone companies as competitors, S&P warned. 

S&P said it was concerned that WorldCom's much publicized recent financial problems may hurt its ability to attract and retain customers. 

WorldCom has indicated only some nervousness on the part of its key customers, but S&P said "If empirical evidence in the coming weeks and months indicate a trend of customer defections that materially impacts cash flow, an additional downgrade would be likely." 

"The viability of the consumer long distance is dying and they have to manage it as long as they can," Principal's Dyslin said.