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Bond issue sets new record
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August 6, 1998: 4:36 p.m. ET
As equities flounder, traders flock to WorldCom's $6.1B corporate-debt sale
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NEW YORK (CNNfn) - When WorldCom Inc. waded into debt markets Monday with talk of a $5 billion corporate bond sale to help finance its pending buyout of MCI Communications Corp., Treasury buyers were agog over what would have been the largest such issue ever.
When the telecom titan finally sold the debt Thursday for $6.1 billion -- a 20 percent premium over initial market expectations -- the mood turned positively ecstatic.
At a time when equity markets are enduring some of their worst turbulence in months, the giant bond sale by the nation's fourth-largest long-distance phone company offered a welcome outlet for heaps of pent-up portfolio investments in search of safer havens.
Analysts said an air of anticipation hung over the markets in the run-up to the debt sale, influencing prices over the past 10 sessions.
"This is a clearing of the air event," said Kurt Shambaugh, a corporate strategist at Credit Suisse. "This has been, 'Oh my God, this thing's coming.' "
On the eve of the issue, underwriter Salomon Smith Barney pitched a conservative sale price of around $3.5 billion to $4 billion. Investors, however, had expected an offering in the $5 billion range, which easily would have topped the previous record for a corporate-debt sale, Norfolk Southern Corp.'s $4.3 billion offering in May 1997.
A last-minute value increase
At the last minute Thursday, WorldCom raised the sale price from $5.5 million to $6 billion, the ceiling for a bond sale under regulatory rules that limit issues to 20 percent over a company's so-called "debt shelf." WorldCom's debt shelf, registered with the Securities and Exchange Commission, was $5 billion.
The bond offering consisted of four distinct parts with three-year, five-year, seven-year and 30-year maturities.
WorldCom, based in Jackson, Miss., said it planned to use the proceeds from the sale to refinance loans for its $7 billion purchase of British Telecommunications PLC's 20 percent stake in MCI. WorldCom is awaiting final regulatory approval of its $37 billion buyout of MCI, which was announced last November.
The deal would catapult WorldCom to the No. 2 spot in the telecom sector, just behind industry leader AT&T Corp., but ahead of Sprint.
John Lonski, a senior economist at Moody's Investors Service, said bond traders would have a hard time resisting WorldCom.
"It's an attractive story," Lonski said. "Here you have an investment grade company selling a 30-year treasury at a nice premium."
Moody's rates WorldCom bonds Baa2, a medium-grade rating, while Standard & Poor's, the other major rating agency, ranks them BBB-plus.
Adding to WorldCom's allure, Lonski and others said, is its low exposure to Asia, which tends to insulate the company from any earnings erosion stemming from fallout in that region.
"A downturn in profitability will not impede its debt repayment capacity," Lonski said. He added he expected to see "many more" debt sellers in the weeks ahead as companies "try to exploit what remain the lowest fixed-rate borrowing costs for issuers in nearly 30 years."
Anthony Crescenzi, the chief bond market strategist at Miller Tabak Hirsch, said he had noticed a widening of corporate spreads after the sale, amid a rash of selling in S&P 500 futures contracts. He attributed the phenomenon to volatility in the stock markets.
"Corporate treasurers are getting a bit nervous about the equity market," Crescenzi said. "They are probably concerned about some spread widening that could come with a deeper decline inequities."
Shares of WorldCom (WCOM) closed up 2-1/8 at 52-9/16 on the Nasdaq Thursday.
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