WorldCom in freefall on accounting woes, Qwest also off; Lyondell sells 10-year notes

By Paul Deckelman and Paul A. Harris

New York, June 26 - WorldCom Inc.'s debt got massacred on Wednesday after the troubled telecommunications giant admitted that it had improperly booked almost $4 billion of revenues in the past two years making it potentially the biggest accounting scandal in U.S. corporate history. Any other credits having even a suggestion of accounting problems - such as the beleaguered Qwest Communications International Inc. - were also dragged downward as WorldCom's nearly $30 billion of bond debt collapsed to levels just above 10 cents on the dollar. Also pulled lower were some telecom names individually free of scandal but still tarred with the collective brush of investor worries about the whole phone sector.

In primary market activity, Lyondell Chemical Co. successfully brought its 10-year note issue to market with a slight upsizing.

But back with the disaster of the day, WorldCom served to drag much of the junk market down with it.

"Right out of the chute this morning, the markets were quoted down anywhere from three to five points pretty much across the board," a trader said, "with the exception of a couple of sectors." He said that the sectors that didn't slide along with WorldCom and the telecoms were the "Treasury-sensitive sectors [homebuilding is one example], which were reacting to the fact that U.S. Treasuries were up 1¾ points."

As the morning went on, he continued, "it became clear that down three or four or five points was where the buyers were living, not where the sellers were living, and as the day went on, a number of sectors rallied back." On the whole, though, he added, "trading was dominated by a handful of names and away from that, people were just watching."

Chief among those names, of course, was WorldCom, whose bonds reeled in the wake the company admission late Tuesday that an internal audit had disclosed that profits for all of 2001 and the first part of this year had been artificially puffed up by accounting sleight-of-hand, forcing the company to restate its financial statements for all of 2001 and this year's first quarter.

The stricken Clinton, Miss.-based telecom giant's bonds had already been languishing on investor concern over whether the company would be able to successfully conclude negotiations for a much-needed new $5 billion credit facility in a timely manner, with its benchmark 7½% notes due 2011 having been steadily knocked down in recent days to around the 40-41 bid area by the end of Tuesday's dealings from levels above 50 earlier in the month.

The latest disclosures simply blew those bonds out of the water, with the 71/2s quoted ending Wednesday at around 11 bid.

The fall was most pronounced among the shorter-dated WorldCom paper, which had managed to hold still-relatively respectable levels before the accounting scandal news, on investor assumption that the credit facility talks would bear fruit, the company would thus avoid any looming liquidity crunch and the short issues, at least, would probably be money good.

WorldCom's 7 7/8% notes due 2003 had been hovering around 72.5 pre-news, while its 6¼% notes due 2003 had been at 63 bid, its 7.55% notes due 2004 at 56.5 bid and its 6½% notes due 2004 at 57.5; all were heard quoted no higher than 15 bid on Wednesday in reaction to the company's latest woes.

A trader said that he had seen the benchmark 7½% bonds - along with WorldCom's other medium-term senior paper - quoted in the 16-18 context when he came in on Wednesday morning. But after having actually firmed slightly to bid levels as high as the 17-19 area, which he attributed to short-covering, they fell back down toward day's end under the crush of bad news to close in the 11-13 area, "regardless of whether it was their short paper, like the ' 03s, or the long stuff, like the '28s. The trader said that he had actually seen some flickering of interest in the longer-dated issues later on in the day, but said that on the whole, "it was really ugly, just a bloodbath."

The sole relatively bright spot on the WorldCom front, he said, was for those holding bonds issued by WorldCom's MCI subsidiary, which held at levels eight to 10 points higher than its corporate parent on the probable assumption that they would make out better in any restructuring scenario. "I think they have a better claim when this whole thing gets [sorted] out," he declared.

MCI's 8¼% notes due 2023, its 7¾% notes due 2024 and 7¾% notes due 2025, all of which had been trading in the mid-40s, were being quoted Wednesday around 24 bid, as were its 7½% notes due 2004.

"People differentiate between these two credits [WorldCom and MCI], another trader agreed. He opined that now WorldCom would almost certainly have to file for bankruptcy protection, with its banks probably unwilling to give it the new credit facility in the wake of the latest revelations. "I don't see how they [the banks] could. I don't know what other options [WorldCom] has."

"It's too bad," he continued, "people came out and said some bullish things Tuesday [before the stunning late announcement] about the '03 and '04 paper," which had pushed some of those issues as high as levels in the 70s. He saw the shorter paper having finished out Wednesday in the 16.5-17.5 area.

"A lot of people are in some serious pain, dealers and end users accounts together," although he noted that his particular shop was not holding any positions in WorldCom when the collapse came. "We were flat, thank God."

Another trader, whose desk had likewise taken no positions, added that "a number of guys had said [to him] 'this is the worst day of my career.' That was a consistent pronouncement [on Wednesday]. For many people, this was a career day - and not necessarily a good one."

With WorldCom skidding lower, other telecom credits were seen down on investor jitters about the phone business. A trader saw Nextel Communications Inc.'s benchmark 9 3/8% senior notes due 2009 "getting killed on [sector] sympathy," down about seven points to the 50-51 bid area, while Level 3 Communications Inc.'s 9 1/8% senior notes due 2009 were also down seven to 35.5 bid.

Among WorldCom's (still) investment-grade long-distance rivals, AT&T was three points lower across the board, its 30-year bonds finishing at 75 bid and Sprint's bonds were being quoted about 100 basis points wider on the day.

Meantime, Qwest Communications International's bonds were being quoted down about 10 to 11 points on the session, its 10-year paper seen closing at 62 bid, while its stock plummeted $2.40 (57.28%) in New York Stock Exchange dealings to $1.79, on volume of 86 million shares - nearly nine times the usual turnover.

The Denver-based regional Bell operating company's bonds and stocks were the victim of a double whammy - not only is it a telecom issue, and subject to the usual investor angst, but Qwest, not unlike WorldCom, has run into severe accounting issues, with the Securities and Exchange Commission reportedly scrutinizing the way Qwest accounted for as much as $1.4 billion of fiber-optic capacity. The Wall Street Journal reported Wednesday that regulators were also warily eyeing whether it had acted properly in booking revenues right away rather than over an extended period of time.

Other similarities include the sharp fall in the company's shares over the past year - heading into Wednesday's session, a more than 85% plunge in Qwest's value and a virtual wipe-out in WorldCom's - and recent quiet revolts by board directors which led to the resignations under pressure of the companies' respective CEOs, Bernie Ebbers at WorldCom and Joseph Nacchio at Qwest.

Qwest, for its part, sought to put as much distance as possible between its own situation and WorldCom's in the mind of the investing public, issuing a statement Wednesday contending that while WorldCom's problems are "unfortunate for our industry" , Qwest is "a different company." Newly installed Qwest CEO Richard Notebaert said in the statement that "I don't believe that anything has changed in the way that we are working with the SEC or in the three areas of the original inquiry that we disclosed last March."

Elsewhere, yet another company under the regulators' microscope, Tyco International, "got clobbered " Wednesday, a market source declared, battered in the wake of the public perception of a snowballing corporate ethics and governance problem and amid new specifics about its own situation; Tyco's former CEO, Dennis Kozlowski - already under indictment in New York for allegedly avoiding state sales tax on his purchase of costly artwork - was also indicted on new charges of allegedly tampering with evidence in the case. Even though Kozlowski abruptly resigned his post on June 3 after 10 years at the helm of the Bermuda-based conglomerate, Tyco has been unable to shake his negative aura, with prosecutors and civil regulators looking into the company's financial relationship with its ex-chief. Tyco shares and bonds have continued to erode, and on Wednesday, its shares dropped another $1.58 (11.66%) to $11.97 on the NYSE; on the bond side, its 5.80% notes due 2006 swooned to 74 bid from 83.5 previously, and its 6 3/8% notes due 2011 fell to 71 bid from 80.5.

With Adelphia Communications Corp. having finally dropped the other shoe with its bankruptcy filing late Tuesday, its bonds were quoted trading anywhere from four to eight points lower, with one trader pegging its senior bonds as low as 38.5 bid. At another desk, the Coudersport, Pa.-based cabler's 10 7/8% notes due 2010 and 10¼% notes due 2011 were seen having only fallen to about 44 bid from prior levels around 48. Its Century Communications Corp. subsidiary's paper - with fewer assets available for disposal than the parent in any restructuring scenario - was about six to eight points lower than Adelphia, but only down slightly from its own already depressed levels, with its 8 3/8% and 8 7/8% notes due 2007 quoted at 36 bid, down about a point on the day.

Rival cabler Charter Communications also "got hit pretty hard" in the wake of the Adelphia decline," a market source said, quoting its 8 5/8% notes due 2009 down more than seven points on the day, to 70 bid.

Meanwhile a relatively quiet day in the high-yield primary market saw Lyondell Chemical Co. price its new offering of 10-year notes.

Meanwhile sell-side sources wondered whether the anticipated crisis in confidence among investors in the wake of Tuesday's revelations about WorldCom might translate into further - and perhaps steeper - outflows from high-yield mutual funds.

In the session's sole transaction, Houston-based Lyondell slightly upsized its offering to $278 million from $275 million and priced the 10-year senior secured notes (Ba3/BB) at 99.248 to yield 11¼% via the four-way joint bookrunning team of Salomon Smith Barney, JP Morgan, Banc of America Securities and Credit Suisse First Boston.

Lynondell came at the wide end of the 11%-11¼% price talk.

Lyondell also priced 7.2 million shares of stock at $14 on Wednesday, an equity offering that was increased from 7 million shares.

In assigning its Ba3 rating to Lyondell's debt and new notes, Moody's Investors Services noted that Lyondell is seeking covenant changes from the banks on its credit facility as well as from its bondholders. The covenant changes, Moody's added, will allow the company to pay the current $0.90 dividend on the additional stock, and allow the company to repay debt of businesses to be sold prior to repaying secured debtholders.

When the new Lyondell notes were cleared for secondary dealings, a trader said, they hovered in the 9.125 bid/9.5 offered area, bracketing the 99.248 issue price. "It just pretty much stayed around there," he noted. "I didn't see it run."

He did describe the new Chumash Casino Resort and Enterprise 9% senior notes due 2010, which priced late Tuesday, as "extremely well liked. People were better buyers if they could see offerings come back to them. I'm certain that it traded up [from the par issue price Tuesday]. It just didn't surface on the offered side. I guess people took it and put it away."

In the only other news that circulated the primary market Wednesday, price talk of a yield in the 12½% area was heard on Solutia Inc./SOI Funding Corp.'s upcoming sale of $250 million of seven-year senior secured notes (Ba2/BB-) via joint bookrunners Salomon Smith Barney and Banc of America Securities.

An official from Solutia called Prospect News to explain how the proceeds from the new notes are tied into the company's credit facility, which it is currently attempting to renegotiate with its bank lenders.

"SOI Funding Corp. is issuing bonds that will be placed into escrow pending the overall completion of our financing plan, which includes a new bank facility or an extension of our existing bank facility" Kevin Wilson, of Solutia, explained to Prospect News on Wednesday.

"This special purpose entity is being created just to house the funds while they are in escrow. Upon completion the proceeds will be assumed by Solutia, Inc."

Wilson said that the initial sticking point in amending the credit facility was using the banks to repay the notes.

"That's why we're trying to satisfy the issue, basically, with this concurrent approach - with the bond offering and the credit facility contingent upon each other."

Solutia has until Aug. 13, 2002 to complete the credit facility, Wilson said, adding that the new facility must meet with 100% approval among the 17 banks on that facility. He declined to identify the lead bank.

The Solutia deal is expected to price Friday morning, according to a syndicate source.

Finally, it would be fair to say that what may turn out to be a history-making downward revision of earnings by the second-largest long distance company in the US, WorldCom, hung heavily upon the market Wednesday, as sell-siders reckoned how much further another massive bookkeeping scandal would likely erode investor confidence.

Two sell-side sources commented that the market could reasonably expect to hear news by week's end of another sizable outflow of cash from the high yield mutual funds.

One source warned that in the wake of investigations into alleged financial misconduct on the part of WorldCom, and into the accounting procedures of Qwest, such an outflow could conceivably exceed the $504.3 million which flowed out of the high yield mutual funds for the week ending June 19 - the second straight outflow, coming on the heels of outflow of $292 million reported by AMG for the week ending June 12.

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