Bids for WorldCom bank debt plummeted into the teens last week following news of the company's fraudulent booking of approximately $3.8 billion in expenses, but no paper traded and most of the desk activity seemed to be limited to shrugging and head-shaking. The company's $2.65 billion line was quoted at a five-point premium to its bonds when LMW went to press on Friday. The $2.65 billion line is pari passu with approximately $30 billion in bonds, but the bank debt currently is bid at that premium because there is a sliver of hope that the banks will be able to negotiate some extra security that will put their exposure ahead of the pack. If not? "Sell the bank debt if it is at a premium to bonds," one trader said. "They are all going to be lumped together and the bank debt has a smaller coupon."
The company's $2.65 billion termed-out paper was last seen trading in the 81 range before the crisis. Rumors circulated around the bank debt markets of paper trading in the 12-14 range, as well as one trade at the 22 level. Several major dealers denied the existence of those trades. Traders also said there was buzz of an auction of the paper that was scheduled for Tuesday, which failed to go off in the low to mid-80s. Traders quoted the company's bank debt off of its bonds maturing in January 2003 and May 2003. One dealer said that the January 2003 bonds started trading at 11 1/2 on Wednesday, ticked as high as 20 during the day and finished in the 17 context. The May 2003 bonds were said to be trading at the 16 16 1/2 level by late Thursday.
Guesses on what happens next were all over the map. Most market players said they do not believe that the company's bank creditors will be willing to inject the company with any more money to secure their place in the pecking order. Either the banks won't want to offer the company funds or the company will say that it wants more than the banks are willing to offer, explained one analyst.
The big question, of course, is the recovery value of the paper in bankruptcy. Originally, one dealer noted that the recovery on the paper would be higher than the current market levels, even after a bankruptcy filing. He explained that the levels had sunk so low because market players were expecting a large quantity of the paper to come out of institutional investors, such as insurance companies. Others think that the current market levels are as good as it gets for investors and people will start selling within the next few weeks.
The situation could have been worse for lenders. The troubled wireline company had two unfunded revolver lines, one $3.75 billion line and a $1.6 billion line, that could not be drawn because of a material adverse change clause. Although WorldCom's accounting fraud has already been dubbed the largest accounting scandal in history, one trader said the pain in the loan market would not be as severe as that caused by Enron. Investors hedged and allocated their exposure to the name, he noted. Calls to Brad Burns, spokesman at WorldCom, were not returned by press time.
WHERE TO?
Dealers and investors were throwing around levels on WorldCom's paper, depending on what happens with the company. Here's some of the guesses.
* Banks give more money and get
security 60-70
* Banks don't offer more money 15-20
* Bankruptcy work out 30-40