Market yawns at WorldCom bankruptcy; Williams Cos. seen headed for junk

By Paul Deckelman and Paul A. Harris

New York, July 22 - WorldCom Inc. finally dropped the other shoe and sought Chapter 11 protection from its creditors, including the holders of its approximately $26 billion of depressed junk bonds. The junk market on Monday was absolutely underwhelmed by the latest development in the once high-flying WorldCom's long fall from grace.

"It's kind of boring, actually," a trader said, "The story [that WorldCom would imminently file for bankruptcy status] was out there last week, so it was kind of a non-event." He saw the battered Clinton, Miss.-based long-distance operator's benchmark 7½% senior notes due 2011 little changed around 13.5 bid/14.14 offered, and saw its 8¼% bonds due 2031 holding around those same levels - the levels at which the market believes bondholders are likely to make a recovery, now that restructuring is about to become a reality.

Traders said that WorldCom's debt had already been trading flat, or without accrued interest (effectively representing loss of several additional points beyond the bonds' nominal value), a decision the market took some weeks back when the company revealed that it would have to restate at least five quarters of results this year and last after having mischaracterized some $3.9 billion of costs as long-term capital expenditures rather than as normal operating expenses.

The trader further saw the bonds of WorldCom's MCI long distance unit "still hanging in" at considerably higher levels than those of its corporate parent' MCI's 8¼% notes due 2023 finished at 38 bid/40 offered, while the bonds of another WorldCom unit, Intermedia Communications Inc. were seen in the 20s.

Another trader called WorldCom "the most anticlimactic thing we had to deal with. It was pitiful."

There seemed to be little real fallout in the rest of the telecom sector - at least not from WoldCom's very publicized troubles. There was other bad news in telcoland, however, as investment-grade regional Bell operating company BellSouth Corp. got pounded in the equity markets after reporting that its second-quarter net income fell to $293 million (16 cents a share) from $880 million (47 cents a share) a year earlier. BellSouth further shook up the market by lowering its forecast for full-year earnings to a range of $2.13 to $2.20, down from a prior estimate of as much as $2.43. That caused the company's shares to plummet $5 (18.11%) to $22.61, on New York Stock Exchange volume of about 18 million shares, four times the usual turnover. Fellow RBOC operator Verizon Communications was down $3.85 (11.85%) to $28.65 on sector weakness.

A bond market-watcher meantime saw BellSouth's bonds widening out about 15 basis points across the board, while Verizon was being quoted at bid levels 30 basis points wider. In addition to the overall slowdown in the telecom industry, regional Bells like BellSouth, Verizon and SBC Communications Inc. have yet another headache - they are among the trade creditors of WorldCom, which owes the Bells collectively several hundred million dollars.

"There were other things happening" in telecom, he said, besides the demise of WorldCom, whose failure had already been pretty much figured into market calculations.

"It wasn't just WorldCom driving the market," one of the traders agreed, in noting a sudden lack of buyers. "It's just a complete and utter panic. The guys who do have cash don't want to make the move [to buy] because they feel that bonds are going to come to their level. They're going to come down. Why buy now, when they're going to be 10 points cheaper in a day?"

While some people with cash "are kicking the tires, volume is very, very low."

He saw Qwest Communications International Inc.'s bonds softening up on Monday (the Denver-based RBOC's debt had been on a firming trend last week) , its 6 3/8% notes due 2002 dipping to about 93.5 bid from prior levels around 96. At another desk, a market source characterized Qwest as "down about two to four points" on the session following the previous week's runup from recent lows. He quoted Qwest's 7¼% notes due 2011 down about two-and-a-half points to 44 bid.

However, some other telecoms did manage to hold their own, with Level 3 Communications Inc.'s benchmark 9 1/8% notes due 2008 "just hanging in there," the trader said. He cited a letter to the shareholders released Friday by the Broomfield, Colo.-based telecom carrier's chief executive officer, James Q. Crowe, in which he denied press reports naming him as one of a number of corporate executives who allegedly received shares of stock in initial public offerings in return for steering investment banking business to the firm providing such valuable opportunities.

"I have never purchased, owned or sold any shares of any of the companies that have been identified in press reports in connection with the alleged IPO purchases," Crowe protested. He said that among the IPOs said to have been involved were those for Rhythms NetConnections, Alamosa Holdings, Radware, interWAVE Communications, Focal Communications, US LEC, Global Crossing, Impsat Fiber Networks and KPNQwest. "I have never sought to purchase shares in hot IPOs in return for giving business to any investment bank," the Level 3 CEO declared.

Having forcefully asserted his innocence, the trader continued, Crowe "comes out looking squeaky-clean. The common was up 3 cents (0.52%) to $5.78, but it was up [on a day when many telecom issues were down] and the bonds hung in there. For the moment, at least, they love Crowe - and they love the Warren Buffett connection." (The legendary billionaire investor is part of an investment group injecting $500 million into Level 3.) He quoted the 9 1/8s around 59 bid, and its 11% notes at 61 bid.

A trader said the cable issues - closely linked, in the minds of many investors with the telecoms - seemed lower across the board, quoting Charter Communications' 8 5/8% notes due 2009 down about a point to 61 bid/63 offered; he also saw Mediacom LLC's 11% notes three points lower at 87 bid/88 offered and its 9½% notes due 2013 down four points at 75.5. Even bankrupt Adelphia got into the easing act, its 9 7/8% notes due 2007 losing two points to end at 37 bid/38 offered.

Charter's bonds had already fallen about two or three points on Friday, with some in the market attributing its weakness to fallout from a Merrill Lynch equity research note which raised the possibility that Charter's commitment to release more data in the wake of the Adelphia Communications Corp. accounting fiasco might backfire if investors began to question what the Merrill analyst termed Charter's more aggressive capitalization policy and that translated into a general wariness about its numbers.

A trader said Charter is suffering from the market skittishness that has emerged following a string of high profile slides by once seemingly solid companies. "It's the same old story. If people smell trouble -even if it's not definitive - they don't wait to find out how the story ends."

Investors in the still nominally investment-grade (Baa3/BBB-) Williams Companies appear to already be heading for the exits, among a general consensus by traders and others in the market that the Tulsa, Okla.-based energy trading and pipeline giant is headed for junkbondland.

Williams "got murdered" Monday, a trader said, after the company warned that it now expects a loss from continuing operations of 35 cents to 40 cents a share - down from a June forecast for earnings of between 20 cents to 25 cents a share. Williams also announced that it would slash its quarterly dividend down to a penny from 20 cents, in order to conserve cash. The Fitch ratings serve has already downgraded Williams to junk status, dropping its debt ratings to BB+ from BBB previously.

A market source saw Williams bonds down anywhere from 15 to 22 points on the session, citing the effects of the Fitch downgrade, the dividend cut and "future negativity due to its trading problems." He quoted Williams' 8¾% notes due 2032 as having tumbled to 32 bid from prior levels around 65. Williams' shares plunged $3.15 (61.05%) to $2.01. Volume of 49 million shares was eight times normal.

Another energy trader, Dynegy's, bonds were meanwhile 11 points lower on the session, its 8¾% notes due 2012 ending at 48 bid and its 7.45% notes due 2006 at 47 bid.

Back among the purely junk energy and power sector, AES Corp.'s 8½% notes due 2007 fell four points, to 30, while Calpine Corp.'s 8 5/8% notes due 2010 were quoted down two points, at 55 bid.

In the primary, one new deal from Ferrellgas Partners LP was heard to be in the high yield market pipeline Monday.

And the roadshow for Swift & Co.'s $400 million offering stalled in the wake of the massive ConAgra beef recall.

Chris Klinefelter, director of investor relations for ConAgra Foods, Inc., told Prospect News that the Swift & Co.'s planned $400 million of seven-year senior notes (B1/B+) via Salomon Smith Barney and JP Morgan suffered a knock-down when the financial world learned that ConAgra would have to recall 18.6 million pounds of ground beef. However, he added, the bond deal, heard delayed on Monday, will return to center ring after the mandatory eight-count, gloves up (see related story in this issue).

One sell-side official told Prospect News on Monday, however, that given the capital markets' current appetite for bad news the ConAgra beef recall could represent more than a glancing blow to Swift & Co.

"I think people are going to be scared of that for some time, and they are going to want comfort," the sell-side official said, adding that the 235-point drop in the Dow Jones Industrial Average Monday on top of the ConAgra recall could further hamper the deal.

"Look at the two successful deals so far (since July 4)," this official added, alluding to Oregon Steel Mills, Inc. and Berry Plastics Corp.

"You've had huge rollovers in those transactions. You have guys who were rolling into new offerings getting a similar coupon or a better coupon, plus they're getting the whole prepayment premium as a result of rolling over.

"I think that really helped the demand for Berry Plastics, which I think was a very successful transaction, given the light: you're looking for $250 million worth of debt and you immediately are up around $175 million just as a result of rollovers. It makes it that much easier."

Pressed to spell out the damage that high yield might sustain as the result of the rout in equities, this official specified that it is too simplistic to merely say that high yield is falling because equities are falling.

"I think the problem is that the high yield is falling on the same news that the equities are falling on," the investment bank official clarified. "You have questions about corporate profitability, future outlooks, the whole corporate accounting fraud situation that's out there, the announcement of WorldCom, today...

"I think that those are the things that are causing the high-yield market to fall, as well as the equity market. It just causes everything to widen out. Why buy a new issue that's yielding 10% when you could buy an existing issue that you may like even more that's yielding 10½%?

"So as a result you see all the pricing get widened out.

"Look at the IESI deal that got done a month ago: it got done at 10¼%. Now it's yielding 11½%."

On Monday the primary market learned Liberty, Mo. propane retailer Ferrellgas Partners will sell $170 million of senior notes.

Ferrellgas CFO Kevin T. Kelly told Prospect News that the books on the 10-year notes would be run by Credit Suisse First Boston and Banc of America Securities, and that notes will price in the July-August time frame.

Price talk of 10½%-10¾% emerged Monday on Casella Waste Systems, Inc.'s $150 million of 10-year senior subordinated notes (B3/B), via Goldman Sachs & Co. The deal is expected to price Wednesday morning.

Also on Monday, price talk of 8¾%-9% was heard on Kaufman & Broad SA's €125 million of seven-year senior notes due 2009 (B1/BB-) via Merrill Lynch. That deal is also expected to price Wednesday.

And the price talk is for a yield in the 11¼% area on ProSiebenSat.1 Media AG's €250 million of seven-year senior notes (Ba3/NR/BB+) via Deutsche Bank Securities Inc. That deal is expected to price during the week of July 22. However one market source told Prospect News that pricing could come as early as Tuesday morning London time.

Although terms were expected Monday on Mobile Storage Group, Inc.'s $160 million of seven-year senior notes (B2/B) via Lehman Brothers and Credit Suisse First Boston, late in the session no terms were available. Price talk on Mobile Storage is 12½%-12¾%.

Finally on Monday, Marks and Spencer Group, plc announced that it had sold Kings Super Markets, Inc. to D'Agostino Supermarkets, for $160 million in cash.

That transaction would seem to lay a wreath on Gristede's Foods, Inc.'s proposed $175 million of 10-year senior notes (B2/B+) via Deutsche Bank Securities and Jefferies & Co., the proceeds of which were to be used to acquire Kings.

Market sources had told Prospect News as early as Wednesday, July 17, that the deal was finished, however Gristede's said last Friday that although their exclusivity period with Marks and Spencer had expired, they were intending to press on with the notes, as well as looking at unspecified "alternate financing."

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