Market pros are explaining the ballooning spreads on WorldCom bonds over the last several weeks as a reaction to the expectation it will announce a big ticket bond offering of as much as $10 billion, perhaps as soon as this week. They expect the company to try to take advantage of what observers say was last week's generally positive earnings announcement, and what has lately been a positive climate for high-grade telecom paper. Though outstanding credits have taken a beating already, players expect spreads to widen further once the new deal finally comes to market.
A WorldCom spokeswoman declines official comment, but indicates that she "won't be calling to complain" about a story indicating that a bond offering is imminent. She would not discuss possible size or underwriters. However, Salomon Smith Barney, which has frequently been the lead manager on WorldCom debt offerings, is widely expected to lead this one as well. Robert Waldman, SSB corporate bond research managing director, did not return calls.
"Expectation has been building for a while now. When you look at their financing needs, it's clear they'll need to come to market soon. Their bonds have clearly lagged the rest of the telecom sector over the last few weeks due to that expectation," says Len Carlson, managing director at Aeltus Investment Management in Hartford, Conn.
Marion Boucher Soper, telecom analyst at Bear Stearns, points out that in addition to $6 billion in outstanding commercial paper, WorldCom has $3.5 billion in maturing bond issues. She won't speculate on exactly when it will happen, but extrapolating from statements the company made in a February conference call discussing fourth quarter earnings, she expects WorldCom to do a sizeable offering soon to extend the maturity of that debt.
Scott Shiffman, telecom analyst at Lehman Brothers, notes that benchmark 8.25% WorldCom of '10 (A3/BBB+) has fallen from 198 to 260 since the conference call. Comparable credits--6% AT&T of '09 (A2/A), 7.9% Qwest Communications of '10 (Baa1/BBB+) and 7.625% Sprint of '11 (Baa1/BBB+)--have barely moved during that same time frame. "Investors have been catching on to the fact that, out of all the telecom service providers, WorldCom has the most significant cash needs," says Shiffman. He expects outstanding WorldCom paper to become even cheaper than AT&T Wireless, (currently the cheapest domestic investment grade telecom credit) after the likely deal is announced and marketed.
J.P. Morgan Chase is also expected to participate in the new deal, in large part because of the sizeable credit lines it has extended to WorldCom, and observers say companies like to repay banks for such loans by allowing them to participate in bond deals. Elaine Zaharis, J.P. Morgan Chase telecom analyst, and Bob LoBue, head of North American syndication for high grade bonds, did not return repeated calls.
Buysiders generally like the prospective debt, which they feel should be offered cheaply. "We'll buy it because: A we like the name, and B, it'll probably come with a hefty concession," says Greg Habeeb, portfolio manager at the Calvert Group in Bethesda, Md. Another manager says WorldCom will have to offer a 10 basis point premium to current levels to make him a buyer. Carlson, who expects WorldCom to announce an offering soon, and then do a roadshow, says he's taking a wait-and-see attitude about whether to buy. "You can't bring a drive-by $7 billion deal. It's going to take some time. People will appreciate that, and, as long as it doesn't take too long, it could benefit the company."