WorldCom firms off lows as company does damage control; Solutia prices well outside talk

By Paul Deckelman and Paul A. Harris

New York, July 2 - WorldCom Inc. debt gyrated around on Tuesday, although in quiet trading, before finally bouncing off its early lows to end essentially unchanged, as the beleaguered telecommunications giant's chief executive officer tried to put the best possible face on things at a press conference - his first appearance in a public forum since the company stunned Wall Street a week ago by acknowledging apparently massive accounting manipulations that would force it to restate earnings. On the downside, Paxson Communications Inc. debt turned lower after the company warned that second-quarter earnings would not meet previous forecasts.

In the primary market, Solutia Inc./SOI Funding Corp brought its offering of seven-year senior secured notes to market - but it had to price the new bonds at a steep discount from par and sweeten them with warrants in order to get the deal done - and even then, they priced well outside pre-deal market price talk.

Back in the secondary sphere, traders noted not much activity, as the market completed its last full trading day of this holiday-abbreviated week. The market is scheduled to close at 2 p.m. ET on Wednesday, ahead of Thursday's Independence Day holiday, which will, of course, shutter all U.S. financial marts. With so little activity expected Wednesday and with Thursday a total blank, The Bond Market Association on Tuesday amended its previous recommendation to also call for a 2 p.m. ET close on Friday.

Even though Tuesday was ostensibly a "regular" day, a trader said, "it seemed like it was just a lot of people squaring their books" until after the holiday break, a trader said. "Not a lot of people are going to take risks" in the face of a long holiday weekend with the market as jittery and volatile as it is, "and that just drove prices lower."

He saw Qwest Communications International Inc.'s bonds down at least three to five points on the session, in line with a steep fall in the Denver-based regional Bell operating company's shares, which nosedived 37 cents (16.09%) in New York Stock Exchange trading, to $1.93, on volume of 27 million shares, slightly more than double the usual turnover.

At another desk, a trader said that "we watched Qwest melt down a bit more," despite an immediate lack of any fresh negative news about the telecom operator, which has had plenty of that lately in the form of a Securities and Exchange Commission probe of its accounting that led to the recent ouster of CEO Joseph Nacchio.

He saw Qwest's 6 7/8% notes due 2033 open around 73 bid and then fall as low as offered levels around 70, with no bids seen. Qwest Capital Funding's 7% notes due 2009, 7.90% notes due 2010 and 7¼% notes due 2011, all recently trading around 56 bid, dipped to 50 bid/52 offered on Tuesday. Its US West Capital bonds due 2028, which not so long ago had been hovering around bid levels in the 65-70 neighborhood before steadily eroding down to around the 49-50 context, where they had gone home on Monday, were down further Tuesday, to as low as 46 bid.

A market observer meanwhile saw Qwest's 7¾% notes due 2031 at 47 bid, about four points under recent levels.

But telecom traders and investors seemed largely fixated on the latest installment of the WorldCom saga, which saw recently appointed CEO John Sidgemore grab the bull by the horns and meet the press at a Washington news conference.

At that National Press Club get together, Sidgemore - appointed to the stricken Clinton, Miss.-based telecommunications operator's helm after company founder and longtime CEO Bernard J. Ebbers was forced out in April - vowed to "get to the bottom" of the accounting mess at the company, which last week stunned the financial markets with revelations that it had improperly accounted for some $3.9 billion of expenses; WorldCom had categorized operating costs, which normally are deducted from the company's bottom line in that period, as capital expenditures, which are spread out over time. That financial sleight-of-hand had allowed WorldCom to show positive EBITDA cash flows and net profits over five quarters going back to the start of 2001 when normally it would have shown sizable losses. WorldCom announced Monday that it would extend its investigation of the alleged accounting fraud as far back as 1999.

Sidgemore also said on Tuesday that the company had $2 billion of cash on hand and that a bankruptcy filing was not imminent - although he acknowledged that WorldCom might be hard pressed to meet a $2 billion debt obligation due in January. He further said that WorldCom remained in talks with its banks on ways to restructure its debt, and that he expected to get a proposal - or maybe even two - in a week. The executive said that he had been in "productive" talks with SEC Chairman Harvey Pitt, who on Monday had criticized WorldCom's disclosures to date.

While the SEC - which has filed a civil fraud suit against the company - complained Monday that WorldCom's response to its initial inquiries on the matter had not been cooperative or forthcoming, the financial markets were apparently impressed by Sidgemore's show of candor; its Nasdaq shares - which had careened all the way down to six cents Monday from prior levels at 83 - recovered a little of their lost ground Tuesday, rising four cents (66.67%), to a dime, on very heavy volume of 890 million shares. That's only about half of the record-shattering 1.5 million shares which changed hands during Monday's meltdown, but still almost 10 times the usual activity level.

On the bond side, a market source said, WorldCom's bonds (which had their own meltdown last week, when they fell anywhere from 30 to 60 points, depending on the maturity, to languish in the mid-teens) , initially opened down about a point or so, with the benchmark 7¼% notes due 2011 opening at 13, then dropping down to around the 11-12 area, before coming back after the press conference to end around 14 bid, pretty much where they had gone home on Monday.

A trader characterized the debt as "volatile," while another acknowledged their up and down movement as the day wore on. He noted that WorldCom's various issues had now pretty much converged down at that mid-teens level, "all trading on top of each other," whether these were the bonds coming due next year or those which wouldn't be maturing for almost 30 years.

He also saw the bonds of WorldCom's MCI unit, softening up, dropping to offered levels around 37 from prior levels around 40, although they still trade at a substantial premium to the parent's paper on the feeling that MCI might be successfully sold and carry the debt along with it.

Sure enough, on Tuesday, well after the market had closed, IDT Corp. - which routinely buys assets from distressed telecom companies - and there is no shortage of those around - said that it planned to offer to buy MCI assets, as well as making a bid for WorldCom's MFS local-phone network and Brooks Fibers Inc. unit.

On the downside, broadcaster Paxson Communications' 10¾% notes due 2008 dipped as much as 7 points Tuesday into the low 90s, after the company warned that its cashflow and revenue would not meet prior expectations.

And Allied Waste's 10% notes due 2009 dropped five points, to 91.5 bid, although no fresh news was seen.

In a generally quiet primary market Tuesday, St. Louis chemical company Solutia arrived at a costly formula for addressing its near-term financial squeeze.

Solutia, Inc., which came to the market with an offering of $250 million, joined a list of credits at the tail-end of June's heavily-populated forward calendar that priced downsized deals wide of the price talk (others included Dave & Busters, Plains Exploration and Production, and LBI Media).

Solutia, issuing through financing vehicle SOI Funding Corp., priced $200,682,160 proceeds in a seven-year offering of 223,000 units comprised one $1,000 senior secured note and one warrant via joint bookrunners Salomon Smith Barney and Banc of America Securities.

The notes, due July 14, 2009 (Ba2/BB-) priced at 89.992 to yield 13½%. Price talk was for a yield in the 12% area.

Proceeds from the notes/warrants deal will go into escrow pending Solutia's successful closure of its credit facility.

Liesl Livingston, the company's director of investor relations, told Prospect News that although the deal was neither cheap nor easy Solutia is "very happy" with the results (see related story in this issue).

As to the remaining business on the forward calendar for the week of July 1 - offerings from Gristede's Foods via Deutsche Bank Securities Inc. and Jefferies & Co., and Workflow Management via Jefferies, sell-side sources have wondered aloud in conversations with Prospect News whether those two transactions will be completed prior to Independence Day.

Others have wondered what the complexion of the post-July 4 primary market will be. Will the skittishness that has developed in the wake of the WorldCom, Inc. and Xerox Corp. disclosures continue to chill the capital markets, including high yield. Or will investors return with the cash that sources report remains relatively plentiful along the sidelines, and strike a bold course?

"It will be interesting to see what things look like after the 4th - whether people come back with their hardhats on or whether they come back ready to spend some money," observed Tim Collins, who co-manages Northwestern Mutual's Mason Street High Yield Fund with Steve Swanson.

"You just got over the end of the second quarter," Collins added. "Maybe people will come back now, and instead of trying to hunker down and window dress.

"Maybe they will try to figure out ways that they can aggressively make some money. The recent past would tell you that people are sort of in a funk" (see Collins's analysis on consolidation in the telecom sector in this issue).

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