WorldCom bonds bounce on loan drawdown; Adelphia slides as Rigas walks the plank

By Paul Deckelman and Paul A. Harris

New York, May 15 - WorldCom Inc.'s bonds bounced off their lows Wednesday after the troubled telecommunications giant told investors and analysts that it planned to draw down its $2.65 billion bank credit facility - a move it termed "an important next step in the process of bolstering our primary bank credit facilities and maintaining the Company's strong liquidity position." But it was all gloom and doom for investors in Adelphia Communications Corp. paper, even as chairman and chief executive officer John Rigas allowed himself to be kicked upstairs as controversy surrounds the company he founded half a century ago.

In the primary market, Cole National Corp. proved to be a sight for sore eyes, as the operator of the Pearle Vision Centers eyewear chain priced its $150 million offering of 10-year notes in the middle of pre-deal market price talk. Trump Hotels & Casino Resorts Inc.'s mildly delayed $470 million two-part deal continued to hang back. And Trimas Corp. was reported by primary players to have hit the road with a new $250 million deal.

WorldCom initially continued the weakness seen Tuesday, when its bonds had softened in the face of overwhelming selling of the company's shares in response to its expulsion from the prestigious S&P 500 index. But later in the session, the company held a conference call, during which it explained its decision to draw down its $2.65 billion bank credit facility.

At first blush, the drawdown could be interpreted as one more negative, a sign that the embattled Clinton, Miss.-based long-distance giant is strapped for cash otherwise, with its shares languishing not far above $1, many of its bonds trading under 50 cents on the dollar, and its credit ratings slashed to junk and in danger of falling further (in fact, Standard & Poor's did warn Wednesday that another downgrade was certainly possible). Only about a week ago, WorldCom had even indicated to investors that it didn't need the $2.65 billion right away, having other potential cash sources on hand. But WorldCom's continued share- and bond-price deterioration gave rise to talk of possible liquidity crunch for the company, which has over $30 billion of now-junk-rated bond debt outstanding.

WorldCom took the bull by the horns Wednesday, telling the financial community that the credit facility drawdown was no act of desperation, but rather, a carefully thought-out move - taken, it stressed, "in coordination with its lead banks." The facility draw-down, it said, would "preserve [WorldCom's] term-out option under the facility until June 2003, as it continues positive negotiations with its lenders on a larger, securitized credit facility."

WorldCom confidently predicted that it would obtain total credit availability of approximately $5 billion, maturing between 2005 and 2006, and said that it intends to repay the drawn-down funds once it closes on the new credit facility, which "is on schedule" to be in place some time next month. It further said that it is also "on schedule" to finalize its new accounts receivable securitization program by May 23. That would replace a current $2 billion program which the company - but for a temporary waiver from its lenders - would be barred from using, since its debt ratings are now junk.

Is the company's apparent confidence just so much spin? Or is it nervous whistling past the graveyard? Or could it be a belief - grounded in fact - that its lenders will give WorldCom the backing it needs? It would appear that the latter was the case, at least in the minds of bond investors Wednesday.

"Post-conference call, the paper was up at least two or three points across the board," a trader declared. "The banks are allowing them to tap into a credit facility of up to $5 billion. The banks are willing to work with them, so the bonds are all up appreciably."

WorldCom's benchmark 7½% notes due 2011 - which had gyrated around on Tuesday before closing slightly lower on the session, at around 40.5 bid/41.5 offered - initially traded as low as 38.5 bid Wednesday, the trader said. But after the conference call, they pushed back up to around 42 bid/43 offered.

He saw other WorldCom debt likewise bouncing off their day's lows to end essentially unchanged to slightly up on the session, with the 6 ½% notes due 2010 firming off its day's low around 36.5 bid to close at 41.5 bid/43.5 offered. In the short-dated paper maturing next year, WorldCom's 7½% notes due 2003, which had dropped into the upper 70s going home Tuesday, came back from their lows to end Wednesday at 80 bid/81 offered . The really long dated paper had fallen into the mid 30s, in some cases, but, like the company's bonds due 2031, recovered on the seemingly positive bank-loan progress news to end the day at 40 bid/41 offered.

WorldCom shares - which had fallen almost 14% Tuesday in record heavy Nasdaq trading of 670 million shares - managed to eke out a gain of five cents (4.11%) to $1.29. Volume trailed off to a comparatively calm 344 million shares - almost sedate, at least when matched against Tuesday's deluge - but still more than five times the usual turnover.

S&P, however, remained cautious. It said that the company's ratings (corporate credit at BB) would remain on CreditWatch with negative implications, even after the company's announcement of the bank credit facility drawdown.

"Although the draw down does bring a degree of surety regarding more immediate liquidity needs," the ratings service acknowledged, "the facility will mature during a period of time in which the company faces other significant maturities." Accordingly, S&P analyst Richard Siderman warned in the message, "WorldCom will need to negotiate a longer-term credit facility or other source of funds to assuage Standard & Poor's concerns regarding liquidity needs beyond the intermediate term."

The other big name in the high yield trading pits Wednesday was clearly moving in the opposite direction, as Adelphia Communications bonds "got crushed," in the words of one market source, who saw the problem-plagued Coudersport, Pa.-based cable operator's 10 7/8% notes due 2010 careen down to 71.5 bid from prior levels at 87.5, while its 10¼% notes due 2011 swooned to 70.5 bid from 84.75 previously.

No question about it, Adelphia "got hammered, absolutely decimated," a trader asserted. He saw its shortest-dated paper, the 9¼% notes due 2002, tumble to 72 bid/74 offered, versus recent levels around 94 bid. Its 8 3/8% notes dropped to 68 bid/70 offered from 78 bid/80 offered.

Another trader quoted the benchmark 10 7/8% notes as low as 69 bid/71 offered on the day, while Adelphia's 91/4s, which mature Oct. 1, were being offered around 75, well down from prior levels in the 90s.

The 8 7/8% notes due 2007 of Adelphia subsidiary Arahova Communications Inc. (the former Century Communications Corp., acquired by Adelphia in 1999) were on the same slide as those of its parent company, quoted down 14 points late in the day, at 73 bid.

Adelphia - loaded up with over $14 billion of balance sheet debt and some $2.3 billion of off-balance-sheet debt stemming from company guarantees of loans made to CEO John Rigas and his family - has been stumbling its way lower ever since the recent disclosure of those off-balance-sheet items, which have led to ratings agency downgrades as well as a Securities and Exchange Commission probe of the Rigas transactions.

Adelphia finally said it would move $1.6 billion of the off-balance-sheet debt onto its balance sheet, and said it would restate several years' worth of earnings to compensate for the change. But the turmoil continued, with Adelphia's largest non-Rigas equity holder, Leonard Tow, chairman and chief executive of Citizens Communications Co., outlining plans in an SEC filing to try to put three directors on the troubled company's board, which could leave the Rigas clan with only a minority of the board - if the family allows Tow to do it, which is by no means certain.

Against that backdrop, Adelphia said Wednesday that Rigas, the company's 77-year-old patriarch, would relinquish his chairman and CEO posts to Erland Kailbourne, former head of Fleet Bank and up till now an outside Adelphia director, and would move up to the post of chairman emeritus.

Adelphia also said it would probe issues raised in connection with the preparation of its annual report, which has been delayed. Deloitte & Touche had been conducting an audit, but Adelphia said that would be suspended until its own investigation is complete.

A trader opined that even the ouster of Rigas, amid the controversy over the loans, would likely not be enough to satisfy investors - or regulators, who would continue digging into Adelphia's tangled finances in hopes of finding who knows what? "All of this is not a good sign" for the once high-flying No. 6 U.S. cabler, he warned.

Moody's Investors Service would agree, as it cut the rating on the company's senior unsecured debt Caa1 from B3 and warned that "In the absence of gaining renewed access to existing bank lines and/or some alternative source of liquidity on a large scale, the company will likely run out of cash very soon, perhaps as early as today," adding that a bankruptcy filing may prove "unavoidable."

Later Standard & Poor's followed suit with a downgrade of its ratings.

Adelphia's well-publicized troubles pushed down the bonds of fellow cabler Charter Communications Inc., which is affected by many of the same cable industry dynamics as Adelphia, though without the latter's specific accounting problems. Charter's 8 5/8% notes fell to 86 bid from 88.25 previously, while its zero-coupon/9.92% paper ended half a point lower, at 68 bid.

One communications company which found itself unable to avoid the bankruptcy courts was Canadian operator Teleglobe, which sought protection in Canada from its bondholders and other creditors, and which plans a similar move in the U.S. This comes several weeks after corporate parent BCE Inc. announced that it would essentially cut off further funding for its money-losing problem child, although BCE did make available $100 million of debtor in possession financing while Teleglobe reorganizes.

Telelglobe's 7.20% notes due 2009 and 7.70% notes due 2029 fell to 4.5 cents on the dollar, half the value of their prior bid levels around 9.

In the primary, terms emerged on two deals Wednesday, as Cole National priced $150 million of new 10-year bonds and Tyumen Oil, an emerging markets corporate eurobond, pushed $500 million through the high yield pipe.

However, as has been the case for the past five business days, the eyes of the high yield primary market wandered toward the portals of a certain German investment bank, wherein an acclaimed artisan of the financial deal has been reported hard at work trying to attract wary investors.

After being delayed from late last week, the transaction had been scheduled for Tuesday or Wednesday this week. But by late in Wednesday's session no terms were heard on the offering, being sold by Trump Casino Holdings, LLC and Trump Casino Funding.

An informed source told Prospect News that the deal has been taken through two restructurings since it came to the market.

Originally laid out as $470 million of first mortgage notes that hit the road April 26, late in the week of May 6 the market heard that a rebore had been done: Trump was carved into a two-part junk bond deal comprised of $340 million of first mortgage notes (B3/B-) talked at 9¾%-10% and $130 million of second mortgage notes (CCC) talked at 12¾%-13%, both with eight-year maturities.

Late Tuesday it was reported that Trump would back the new deal - which was already backed by Trump properties in Atlantic City, N.J. and Gary, Ind.- with revenues from the Trump 29 Casino near Palm Springs, which reportedly has a five-year management contract with Trump Hotels.

The plot seemed to thicken with the following passage from a 10-Q filing Trump made with the Securities and Exchange Commission on Wednesday: "The interest rates of the first mortgage notes and second mortgage notes, as well as other terms of the offering, have to be determined. There can be assurances, however, that the offering will be completed as proposed or otherwise."

Late in Wednesday's session sell-side sources in communication with Prospect News were wondering just what was implied by the last sentence of that filing? In other words, is it possible that the Trump deal will end up being owned by the bank if not enough investors can be found?

Deutsche Bank declined to comment.

Elsewhere in the high yield primary, terms of Cole National Group, Inc.'s sale of $150 million of 10-year senior subordinated notes (B2/B) swam into view. The Rule 144A notes priced at par to yield 8 7/8% according to a syndicate source. Lehman Brothers and CIBC World Markets were joint bookrunners.

Also on Wednesday Russian petroleum company Tyumen Oil priced $500 million of five-year senior unsecured loan participation notes (Ba3/B+/B+) at par to yield 10%, according to a syndicate source in London. Price talk had been 9 7/8%-10%.

"This is the third oil company in Russia to privatize," the syndicate source said. "They are very large companies that have reorganized themselves substantially since the crisis in Russia, in 1998. They are now ready to come to market."

This syndicate official allowed that investors see something of a safe haven in a company like Tyumen as they have with recent offerings from U.S. oil and gas companies. But he added that Russian energy companies presently are a story unto themselves.

"Yes, it's a favored sector," the source conceded. "But what's really driving the spreads here is the investors' perceptions that Russia is a fast-improving credit. And (the energy credits) are good credits within that sector.

"Your main risk here is the Russian sovereign risk. And that is a risk that is getting re-rated by investors."

Credit Suisse First Boston and Salomon Smith Barney were joint bookrunners on the Tyumen deal.

Price talk of a yield in the 9¾% area emerged Wednesday on Earle M. Jorgensen Co., Inc.'s $250 million of 10-year senior secured notes (B-), via joint bookrunners Credit Suisse First Boston and Deutsche Bank Securities. That deal is expected to price Friday.

One sell side official who spoke Wednesday with Prospect News reported sensing a certain slowness in the high-yield market at present and attributed that slowness to three factors.

"Right now I think it's a little slow just because of the volatility of the equity markets and the fact that the holiday is coming up next week. So no one's really announcing anything unless it's going to be a two- or three-day process. Typically people don't want to go over the Memorial Day weekend."

"I think another reason things were a little bit slow last week is WorldCom," the source added.

"WorldCom - what did they have - something like $28 billion of debt that became high yield-quality all of the sudden. I think people are sitting on the sidelines making sure everything is okay with their portfolios at this point.

"The guy who was managing WorldCom in the high-grade fund now has to switch that allocation toward the high yield guys. The high yield guy takes that money into his fund, and wants to re-jigger things. You figure $28 billion of debt in the telecom sector - that all of the sudden becomes the largest issuer by far this year.

"As a result portfolio managers spend the prior two weeks looking at their portfolios and seeing how WorldCom will impact them, if at all."

With regard to the continent of WorldCom debt slamming into the island of High Yield, this sell-sider posed an interesting question that has no doubt been on the minds of some investors.

"If you add WorldCom to a bunch of these high yield indexes and it continues to fall from where it is now it will drive everything down. The question is 'Will the high yield funds actually own that, or will it be the predecessor funds in the high grade world that will be penalized?'"

Nevertheless, this official believes that the high yield primary will continue to see business at a pace to which observers have become accustomed during the first third of 2002.

"I personally think that we're just going to continue to knock off somewhere between five and eight transactions a week for somewhere between $1.2 billion and $1.8 billion for the rest of the year," the official estimated.

And when Prospect News inquired of this official whether the more challenging credits would continue to face steep climbs, and sometimes wind up in heaps at the bottom of the cliff, the response was: "I think underwriters are going to continue to try to push the limits as always. And I think investors right now still remember what happened to them in 2000 and 2001. So they're not going to be overly willing unless there is substantial yield to purchase anything that could hurt them in a very short time frame."

Meanwhile in secondary trading of recent issues, a trader saw the new El Paso Energy Partners 8½% senior subordinated add-on notes due 2011 dropping back to around 101 bid/102 offered. That's down from both the bonds' Tuesday issue price of 102 and its late levels Tuesday at 102.5 bid.

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