WorldCom debt quiet despite stock slide; Aurora up on financing news

By Paul Deckelman and Paul A. Harris

New York, July 1 - The second half of 2002 opened on a generally quiet note Monday, with WorldCom Inc.'s bonds seemingly in the eye of the storm that continues to swirl around the troubled Clinton, Miss.-based telecommunications giant. While the company's already battered shares lost almost all of what little value they still had left in ridiculously heavy Nasdaq trading of over 1.5 billion shares, the company's bonds held steady at their recent level in the mid-teens, having already had their meltdown last week.

In the primary market a pre-holiday torpor seemed to prevail Monday. A few details emerged on a new deal from Casella Waste Systems, which figures to price sometime during the month of July. However of the three deals that were carried over from last Friday's forward calendar as Monday business -Solutia Inc., Gristede's Foods, Inc. and Workflow Management, Inc. - by late in Monday's session no word had been heard.

Monday afternoon informed sell-side sources confirmed most of the information that was contained in releases from both ratings agencies on a deal from Rutland, Vt.-based waste hauler Casella Waste Systems - that it will bring $175 million of senior subordinated notes (B3/B) concurrent with a $300 million senior secured credit facility (B1/BB-), and that the bond deal will price sometime during the month of July.

Although Moody's and Standard & Poor's both specified that the Casella notes will carry a 10-year maturity, one source said that the maturity has yet to be finalized.

Goldman Sachs & Co. will run the books, according to sources.

Three deals that were expected to price last Friday and were carried over as business to be transacted Monday had not done so by the end of Monday's session, according to several market sources.

The market was expecting terms again Monday on Solutia/SOI Funding Corp.'s $250 million of seven-year senior secured notes (Ba2/BB-), via Salomon Smith Barney and Banc of America Securities, Gristede's Foods' $175 million of 10-year senior notes (B2/B+) via Deutsche Bank Securities Inc. and Jefferies & Co. and on Workflow Management's $170 million of seven-year senior secured notes (B2/B+) via Jefferies.

"The bond market's getting killed, and these deals (especially Solutia and Gristede's) are casualties," one sell-side source said, alluding to the impact of bookkeeping debacles revealed last week by WorldCom and Xerox upon the capital markets.

Another sell side source, acknowledging that terms on the three above-mentioned deals seem to be late in arriving, said that their possible struggles, taken in conjunction with the three downsized deals that priced wide of price talk last Friday (Dave & Busters, Plains Exploration and Production, and LBI Media) are not likely coincidental occurrences.

"The market's looking for some direction," this sell-side official said. "When you have massive events like WorldCom and Xerox you're going to see a bad pricing environment.

"And the market could be closed if we have another dramatic event like WorldCom," this official warned.

"In order for things to improve people have to start getting comfortable with numbers," the source continued.

"Once results start improving and people can start putting a little faith into corporate management and the documents they put out I think sentiment will start to pick up.

"But until then I think the market's going to be choppy."

Back in the secondary, WorldCom's shares traded for the first time since they had been halted last week in the wake of revelations about apparently massive book-cooking at the telecom company, and as the company said that it was extending its investigation of alleged accounting fraud as far back as 1999 (from 2001 and the first part of this year, which it had originally acknowledged). Those shares, which had been at 83 cents when trading was hurriedly halted Wednesday amid the company's initial disclosure of the latest accounting problem, plunged 77 cents, or 92.77% in record busy dealings, to finish worth just 6 cents - one one-thousandth of the once high-flier's peak worth of $60 several years ago.

What little value is left there is likely to be further eroded by investor reaction to the Securities and Exchange Commission's negative response to the company's latest disclosure; SEC Chairman Harvey Pitt said that the company's filing - in which it said it would restate $3.9 billion of expenses which had been wrongly reported as capital expenditures rather than ongoing operating costs (thus pumping up profits and EBITDA for the periods covered) was "wholly inadequate and incomplete."

The regulator's tersely worded response added that the WorldCom response to the problem "demonstrates a lack of commitment to full disclosure to investors and less than full cooperation with the SEC." The SEC has already brought a civil charge of fraud against the company in response to the accounting fiasco, which resulted in the firing last week of Scott Sullivan, WorldCom's chief financial officer and a long-time confidante of ousted chief executive officer Bernard J. Ebbers, who resigned under pressure in April.

The widening probe into the financial shenanigans is expected to zero in on the role played by Ebbers, who built the company from a small reseller of long-distance services into the Number-Two U.S. long-distance company and a major player in other areas of telecommunications via a dazzling string of debt-financed acquisitions, before the whole house of cards came crashing down.

The WorldCom filing with the SEC did not discuss Ebber's role in the alleged accounting manipulations, nor did it discuss what role - if any - might have been played by either the WorldCom board or the company's auditor, Arthur Andersen LLP - already facing likely dissolution for its role in the Enron Corp. disaster - in approving WorldCom's accounting.

While all of this was happening on the corporate and equity fronts, junk market observers and participants said, WorldCom's debt remained pretty much around where it had ended the week on Friday, with its benchmark 7½% notes due 2011 quoted at 14.5 bid/15.5 offered. Those bonds had been trading around 40 before the accounting problem disclosures, and then crashed all the way to around 11 bid before recovering slightly to the mid-teens.

Meantime, a trader said, the bonds issued by WorldCom's long-distance unit, MCI, when it was still an independent entity, were being quoted as high as 38 bid/40 offered.

"There's a pretty good differentiation in the market" between the parent WorldCom issues and the MCI paper, he said, explaining that "there's a feeling that [MCI] can be peeled off as a saleable asset. If they sell it, maybe they take the debt with them."

Bonds of another WorldCom subsidiary, Intermedia Communications, were also seen trading at a substantial premium to the parent's debt, last quoted in the lower 30s.

Also in the telecom area, Nextel Communications Inc. bonds - which have recently taken a shellacking on investor angst about the telecom industry as a whole and ratings agency warnings about the health of the wireless sector of telecom in particular - were heard better, its zero-coupon notes due 2008 seen having gained nearly four points to close around 49 bid.

Xerox Corp. bonds - which initially fell sharply Friday in response to the news that the Stamford, Conn.-based copier and office machines giant would have to restate $6.4 billion in revenues from 1997 to 2001, before bouncing back later on to recover most of the losses and end trading only moderately lower, were quoted about a point easier in very light dealings Monday, its bellwether 5½% notes due 2003 at 85 bid/86 offered and its 9¾% notes due 2009 at 81 bid/83 offered.

On the upside, Aurora Foods Inc.'s debt was quoted at solidly higher levels Monday, its 9 7/8% notes due 2007 moving up to 75 bid from prior levels in the mid-60s. That tasty gain follows Friday's announcement from the St. Louis-based maker of such well-known packaged food brands as Duncan Hines cake mixes, Mrs. Paul's frozen fish products, Aunt Jemima pancake mixes and Log Cabin syrup that it had reached agreement with its banks and major investors on a plan to secure $62.6 million of additional financing and has signed an amendment to the Company's credit facility.

Aurora shares were up 15 cents (10%) to $1.65 Monday on the New York Stock Exchange.

But generally, bond trading Monday was sleepy. "Anyone who wasn't already in the bunker [after last week's tumult] is there now and has closed the door," a trader said.

With the market week abbreviated by an early 2 p.m. ET close Wednesday and a full closure for Thursday's July 4th holiday, market players "can expect a dead week," one market-watcher said. "No one will be around. It's gonna be a tough week" to get anything done.

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