WorldCom swoons on earnings warning; Adelphia lower on ratings downgrade

By Paul Deckelman and Paul A. Harris

New York, April 22 - The bonds of WorldCom Inc. went into a freefall Monday after the troubled telecommunications giant slashed 2002 revenue projections at a key unit - and warned that its cash flow would come up over $1 billion short of previous estimates. Another struggling, nominally investment-grade telecom operator, Qwest Communications International Inc., was also noticeably lower in the wake of a ratings cut that left it just one notch away from junk-bond status. Pure junker Adelphia Communications Corp. continued its recent slide to nowhere after Standard & Poor's cut the once-coveted cabler's ratings by two full notches, putting it in CCC territory.

In quiet primary market dealings Monday, meanwhile, one new deal came out of the bag on Monday as Stamford, Conn.-based consumer goods packager Silgan Holdings, Inc. announced a $200 million drive-by via joint bookrunners Morgan Stanley, Deutsche Bank Securities Inc. and Salomon Smith Barney.

Silgan, which recently stated in a filing with the Securities and Exchange Commission that it is the largest manufacturer of metal food containers in North America with a unit volume market share in the US of approximately 47% in 2001, will do an add-on to its 9% senior notes due June 1, 2009.

The anticipated ratings are B1/B. A conference call is set for 11.00 am ET Tuesday with pricing later in the afternoon.

High yield market sources who spoke with Prospect News on Monday noted the past week's reported $317.3 million inflow to high-yield mutual funds. The sentiment seems to be that presently money is likely to continue to flow in.

"I think you'll continue to see money come into high yield because the short rates are low and because of the equity markets," said Pioneer Capital Management high-yield fund manager Margaret Patel on Monday morning, some hours before the equity markets closed with the Dow Jones Industrial Average having fallen 1.18%.

"With short rates so low and the economy starting to do better," Patel added, "people are will to take a risk for the extra yield because the yields for money markets and shorter-term Treasuries are just unacceptably-low for investors."

A sell-side source noted Monday that nine straight weeks of inflows is a string that might be seen to be pushing the odds.

"Nine weeks in a row - that makes you wonder," this official commented. "At what point do people maybe withdraw a little bit from these funds?"

However this official quickly answered that question with another.

"Where do you park it?" the source asked rhetorically. "The Dow is approaching 10,000 again. The equity market's off 120 points today. You can't really run to equities."

This official added that all of the cash flowing into the high yield bears a direct relationship to the tightness at which certain credits have been pricing. Pointing especially to XTO Energy which priced $350 million notes last Thursday to yield 7½%, the official said "These things are trading like investment-grade credits.

"I think if people start seeing them keep coming that tight or tighter and they measure them against similar deals which may be a little riskier but pay 8¼% or 8½%, they'll play those even if there is a little more risk."

Pioneer's Patel said her fund did not get involved in XTO. "I did not play because there wasn't a lot of excess return.

"The pricing reflected the market sentiment pretty well," Patel added. "I think it reflects a sector that people still like and the fact that this company has a long-term track record of being able to operate successfully in volatile and unfavorable energy markets. They have been in the market for a number of years, and more to the point they have managed well during very difficult times, in 1998 and 1999. So the quality of the management team, in riding the down-cycle in energy, was very good.

"Energy, especially by the process of elimination, looks reasonably solid at this point."

The only other news that circulated through the primary market on Monday was price talk of 12¼%-12½% on PCA International, Inc.'s $200 million of seven-year senior notes (Caa1/B-) via Goldman Sachs & Co. That deal will price late Tuesday or else on Wednesday, a syndicate source said.

Back in secondary trading, WorldCom, the Clinton, Miss.-based No. 2 U.S. long-distance company, "was the biggest, ugliest story in the bond world today," said a distressed-debt trader whose firm is nonetheless tracking the downward progress of its still-nominally investment-grade (A3/BBB) bonds. He quoted its paper down anywhere from eight to 14 points on the session, depending on how far out on the curve its many issues of bonds (which range in maturity dates from 2003 to 2031) are. He pegged WorldCom's 6¼% notes due 2003 at around 85 bid by the end of the day, while its 8¼% bonds due 2031 were languishing around 62 bid.

At another desk, an observer saw an even more pronounced dive, putting WorldCom's bonds off by anywhere from 12 to 17 points on the session. He saw prices ranging from the 7 7/8% notes due 2003, having fallen from above-par levels to 89.5, to the 6.95% notes due 2028, which were trying to stay afloat at 57 bid. Among the more intermediate-term paper, he quoted the 8¼% notes due 2010 at 69 bid and the 7½% notes due 2011 at 68, both more than a dozen points lower than Friday's close.

The bond market bloodbath was matched by WorldCom's stock slide, as the shares fell $1.97 (32.94%) in Nasdaq trading to $4.01. Volume of 254 million shares was more than five times the average daily turnover.

WorldCom incurred the wrath of bond and stock investors after it warned late Friday that revenues for 2002 for its WorldCom Group Internet and data transmission unit would total between $21 and $21.5 billion, while EBITDA (earnings before interest, taxes, depreciation and amortization, considered the key bond market measure of a company's cash flow generation potential and ability to service debt) would be between $7 billion and $7.5 billion. Those projections were well down from the guidance WorldCom released in February, of revenues in the $22.2-22.6 billion range, while EBITDA had been predicted at $8.4-$8.5 billion. And even those February projections represented a retreat from more bullish earlier guidance, as the company scaled back its expectations in the midst of the continuing telecom industry malaise. It did not, however, reduce guidance for its MCI long-distance unit.

Standard & Poor's was also disturbed by WorldCom's warnings and on Monday cut the company's long-term corporate credit to BBB from BBB+ and said another downgrade was possible. Despite WorldCom's moves to cut expenses in the face of anticipated lower revenues and cash flow, by throttling back on capital expenditures by about $1 billion, S&P cautioned that it "continues to anticipate that the enterprise demand prospects in the telecommunications industry will be extremely difficult in 2002 and into the first half of 2003, thereby placing additional pressure on WorldCom's ability to increase cash flow and reduce debt to EBITDA below the 2.5 times area by the end of the year."

Another nominally investment-grade rated company struggling with the telecom industry meltdown has been Qwest Communications International, whose Baa3/BBB bonds were seen at least five points lower on the day following last week's warning that full-year 2002 revenues would total $18-18.4 billion - well below 2001's $19.7 billion, and down from the $19.2 billion analysts had been expecting. That, in turn, caused S&P to drop the Denver-based local and regional telecom service provider's credit ratings a notch to BBB-, as the rating agency said that the downward revision was "significantly below" what S&P had been looking for. It said the revision "reflects more sustained pricing pressure, intense competition and weak demand in many of Qwest's products and services."

The observer said that "most of the telcommunications issues came off [Monday] and WorldCom suffered the biggest hit, for obvious reasons. Qwest probably only came off about five points [Monday] because they had their downgrade Friday, and it put some more pressure on people who didn't react on Friday, and they sold those off as well [Monday]."

He saw Qwest's 5 7/8% notes due 2004 were at 82.5 bid, while its 7¾% bonds due 3031 dipped to 73 bid. In between, Qwest's 7.90% notes due 2010 finished at 78 bid, "all down at least four or five points on the day."

Outside of such possible future fallen telecom angels, Adelphia Communications' bonds were quoted down about three points on the session after dropped the Coudersport, Pa.-based No. 6 U.S. cable TV operator's ratings two notches to CCC+ from B. Its 10 7/8% notes lost three points to close at 86.5 bid/87.5 offered.

"All the action [Monday] was in ADLAC (Adelphia) and WorldCom," the distressed-debt trader opined. He saw Adelphia's zero-coupon bonds due 2008 as having fallen several points to 46 bid/49 offered.

Apart from communications issues, "today was pretty uneventful," noting that the attentions of many buyside players this week would be riveted on Bear Stearns' annual credit research conference, scheduled to take place Tuesday and Wednesday in New York.

He saw Lyondell Chemical "a little weak," with its 9 7/8% notes off a point at 98.75 bid/99.75 offered.

High yield steel bellwether AK Steel Holding Corp. is one of only a small handful of junk steelers who are actually not in dire financial straits, with most everyone else either already bankrupt or probably headed there - but even AK was forced to post a wider first-quarter loss than a year earlier ($25.6 million/24 cents a share vs. $13 million/12 cents a share a year ago), citing "significantly" higher maintenance costs.

Bonds of the Middletown, Ohio-based maker of flat-rolled carbon and stainless steels continued to hold at 103 bid/104 offered, investors apparently unfazed by the soft earnings news.

Lucent Technologies Inc. bonds were little changed to only slightly lower, "trading in a pretty tight range," as the Murray Hill, N.J.-based telecom equipment maker posted a net loss for the second-quarter of $495 million (16 cents a share) - far smaller than the $3.07 billion ($1.09 per share) red ink bath it took a year ago. Excluding a one-time charge, the per-share loss for the latest period was 14 cents - a smaller loss than the 17 cents the analysts were looking for.

Polaroid Corp.'s already badly depressed bonds fell even further in the wake of a Massachusetts state investigation into whether the bankrupt Cambridge, Mass.-based instant photography company forced employees into buying its now-worthless stock to foil an ultimately unsuccessful hostile takeover attempt in 1988. Polaroid, which sought protection from its junk bond holders and other creditors in October, is hoping to sell its assets to Bank One Corp.'s investment arm, One Equity Partners, for $265 million in cash.

Polaroid's bonds, recently quoted around 7 bid, were treading water Monday in the 4-to-6 range.

Late in the session, Mandalay Resort Group announced that it expects earnings for the fiscal first quarter ended April 30 to top 70 cents per share on an operating basis - which would be an all-time quarterly record for the Las Vegas-based gamer. That would easily top last year's 61 cents a share.

A market-watcher said "it's a good announcement, and it looks like they'll show a big profit" when earnings are released Tuesday afternoon. "Their bonds should tighten [Tuesday]." That would put Mandalay in the same grouping as rivals Harrah's Entertainment and MGM Grand, both of whom reported sizable profits last week, with their bonds hovering at or above par.

Mandalay's 6¾% notes due 2003 were recently quoted at 100.5 bid, while its 9¼% notes due 2005 were at 102.5 bid.

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