Two distressed securities analysts have widely different views of the worth of WorldCom's holding company bonds, all of which were trading at 13.5 cents on the dollar last Tuesday morning. Matt Breckenridge, an analyst at DebtTraders, which holds a proprietary position in WorldCom, believes the bonds are worth far more. He says he would begin selling the bonds in the 40s or 50s, a level he believes the bonds will reach as investors gain a better understanding of what the company's future EBITDA will be. He says the bonds trade at approximately one times EBITDA, and adds "You can buy any company's bonds at one times EBITDA and make money." He estimates the value of the company at four times EBITDA, arguing that it will not decline rapidly because it has a number of customers locked into long-term contracts. Breckenridge says the industry consultants with whom he has spoken are largely advising their clients to continue using WorldCom's services, though some are advising clients not to sign any new contracts. Breckenridge would not disclose the size of DebtTraders' position in WorldCom.
Frank Colombo, head of research at the Seaport Group, believes the bonds are worth only slightly more than where they were trading last Tuesday. While he agrees with Breckenridge's EBITDA number, he says it is "obviously a melting ice cube." He believes most of WorldCom's customers will begin transferring their business to other service providers, as most already have a relationship with more than one. Also, he says it is reasonable to expect that the quality of WorldCom's service will deteriorate as service representatives begin looking for new jobs with other companies. Further, he argues that there is no sign of price stabilization for long distance services. Colombo says that it makes more sense to look at free cash flow than EBITDA in figuring out the worth of WorldCom's bonds, because that number will not change as drastically. Even though cash flow could decline in future quarters, he believes WorldCom's bonds are worth 15 cents on the dollar in what he sees as an "all but inevitable" workout scenario. The Seaport Group brokers trades in distressed securities, and does not hold a proprietary position in WorldCom.