Investors in debt-laden WorldCom Inc. hammered the company's stock and bonds Monday over fears that the nation's second-largest long-distance carrier may be on an irreversible course toward bankruptcy. The sell-off helped depress the entire telecom sector, from wireless to local phone companies.
WorldCom shares fell 28%, hitting an all-time low of $2.20 on Monday, before closing at $2.35, down 92 cents on Nasdaq. The 264.9 million shares changing hands made it not only the most active stock of the day but also the fifth-most active ever.
Meantime, bondholders worried that WorldCom, which operates MCI Group, will be reduced to junk-bond status and the company will fail to meet $6.4 billion in debt payments in the next three years, analysts said. Selling by bondholders knocked the market price of some of the company's debt securities to less than 50 cents on the dollar, continuing a plunge that began several weeks ago.
"Bondholders are getting burned big time by telecom failures like Global Crossing, and they're not waiting around to get zero in a bankruptcy," said Patrick Comack, senior analyst at Guzman & Co. in Miami. "A lot of people believe that, long-term, WorldCom is maybe not viable."
The Clinton, Miss., company wouldn't comment on price fluctuations, but WorldCom executives reiterated that they are "very confident" in the company's ability to pay back its debt and to meet its cash-flow targets for the year.
The immediate concern is that WorldCom's debt securities will be reduced to junk-bond status by rating firms Standard & Poor's and Moody's Investors Service, both of which have the bonds on review with downgrades likely. Comack said that reducing the ratings to junk would kick in provisions forcing the firm to repay $2 billion in loans within 90 days. That would wipe out the company's $2 billion in cash on hand and make it difficult to refinance debts over the next few years, he said.
Worse, WorldCom's revenue stream has been "drying up" domestically in the heat of competition from other carriers, especially from wireless companies offering one-rate plans for long-distance calling, said Todd Rosenbluth, an S&P stock analyst not associated with the ratings side of the firm.
"If this were a weak company in a growing industry, or at least in an industry with light at the end of the tunnel, it would be a better stock to hold on to," Rosenbluth said. He was surprised by the effect of the bond market's credit-risk fears, saying: "We didn't expect it to be this bad this fast."
S&P, along with numerous brokerage firms, has recommended for weeks that investors sell the stock, but many have been bidding down the price all year as they flee the telecom sector.
In a January report, Scott Cleland of the Precursor Group research firm called WorldCom "a dead growth model walking." He said the firm's future is bleak because it has run out of easy cost-reduction measures and has little chance of growing amid increasing competition, falling prices and a glut in fiber-optic networks.
In addition, Cleland sees little chance the firm would be purchased because it has a network created through scores of acquisitions and faces competition from other telecom firms with assets for sale, such as AT&T Corp., Qwest Communications International Inc. and Sprint Corp.
Analysts expect that WorldCom will be able to repay $60 million in debts due this year, but they say bondholders fear the company won't be able to pay or refinance debts of $1.6 billion due next year, $2.5 billion due in 2004 and $2.3 billion in 2005.
Worse, the firm is expected to write down a big chunk of its goodwill, the premium over market value that it paid for its acquisitions. Though up to $30 billion in write-downs will be noncash--the firm already paid for the purchases--it will cut shareholder equity from nearly $58 billion at the end of March.
That, Comack said, could violate bank loan clauses that limit debt to 68% of equity. The firm would have more debt than equity, he noted.