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Other Telecom, Bank Stocks Dragged Down

Reaction: As WorldCom's bonds plunge in value, those holding the paper are feeling the pain.


As WorldCom Inc. bonds plunged Wednesday, news of the long-distance company's alleged $3.9-billion accounting fraud dragged down securities of other telecom companies and the banks that have financed them.

Investors in Clinton, Miss.-based WorldCom held debt securities with a face value of $28 billion, including $11.9 billion issued last year in the biggest bond sale by a U.S. company. Companies with the biggest exposure include foreign insurers such as Aegon ($200 million) and Manulife Financial Corp. ($172 million).

On Wednesday, WorldCom's long-term bonds were trading for as little as 11 cents on the dollar, down from 40 cents before Tuesday's disclosure of the accounting scandal. Its short-term debt fell from 73 cents on the dollar to 19 cents. The prices reflect investor concerns that WorldCom may seek bankruptcy protection and the bonds won't be fully repaid.

WorldCom's stock never opened for trading Wednesday. In after-hours trading Tuesday, it had tumbled to 35 cents a share from its regular-session close of 83 cents. The stock was trading at around $62 three years ago.

The slide has cost WorldCom investors dearly. The California Public Employees' Retirement System, the largest U.S. pension fund, said its losses on WorldCom stocks and bonds could reach $565 million. Michigan's state pension fund put its losses at $116 million.

"The market is saying this company's probability of winding up in bankruptcy has increased dramatically," said Mark Kiesel, senior strategist at Newport Beach's Pimco bond funds. He said the debacle was accelerating a flight by investors out of risky stocks and junk bonds and into conservative fixed-income investments.

Indeed, some well-known junk bond mutual funds suffered sharp losses in share value Wednesday, as bonds of WorldCom and other junk issuers sank. The Fidelity Capital & Income fund dropped 3.7% for the day. The Pimco High Yield fund fell 1.6% and the Strong High Yield Bond fund tumbled 2.5%.

By contrast, investors poured into U.S. Treasury securities. The yield on the 10-year Treasury note dropped to 4.74% from 4.81% Tuesday.

A WorldCom bankruptcy would be the largest in U.S. corporate history, surpassing that of Enron Corp. Like Enron, WorldCom was financed by the nation's biggest banks, whose stocks were punished Wednesday despite their assurances that, as Citigroup Inc. Chief Financial Officer Todd Thomson put it, "the financial impact [on Citigroup] ... should be relatively modest."

Citigroup, the largest financial services company, said it expected losses on WorldCom bonds owned by its insurance subsidiaries to total $335 million, with an additional $40 million in "possible exposure in other areas."

Citigroup dropped $2.12 to $37. Shares in the nation's second-largest bank, J.P. Morgan Chase & Co., lost $1.44 to $31.49; No. 3 Bank of America Corp. declined $2.58 to $67.45.

Mellon Financial stock fell $1.55, or nearly 5%, to $30.65 after the bank said it could lose $100 million on a loan to WorldCom.

Bank of America led a bank syndicate that previously arranged a $2.65-billion unsecured line of credit for WorldCom, with Citigroup and Morgan as co-leaders. WorldCom drew down that line last month, putting some 30 banks that shared the loan at risk of loss. Last month, B of A and Morgan arranged an additional $1.5 billion in loans secured by payments by WorldCom customers, and thus are presumably safe.

WorldCom's financial filings show it also had separate unused credit lines for $1.6 billion and $3.75 billion. The banks said WorldCom would be unable to access those lines now that it has admitted that it improperly booked more than $3.9 billion in routine expenses as capital improvements.

Before the disclosures, WorldCom was trying to negotiate $5 billion in new credit lines with its banks. Its chances of success are now "significantly reduced," said Robert Konefal, an analyst at Moody's Investors Service.

Bank of America could not be reached for comment. Morgan said its WorldCom exposure "is very small."

Meanwhile, WorldCom bondholders are worrying about whether they'll be elbowed aside by the banks should WorldCom file for bankruptcy.

"As of now, the banks are the enemy," the bond research firm CreditSights Inc. warned.

WorldCom's $28 billion in bonds and notes, which even before the news had been classified as speculative by the ratings agencies, immediately were lowered to the lowest realms of junk-bond status.

Other telecom companies took a beating Wednesday. AT&T Corp. dropped 37 cents to $9.62, and Sprint FON was down $1.19 to $10.10.

The debacle also rocked computer service provider Electronic Data Systems Corp., whose stock fell 6.9% on fears that a $6.4-billion WorldCom contract was jeopardized.



On the Hook

Analysts' estimates of banks' potential exposure to WorldCom, based on outstanding loans on the banks' books.


Institution (millions) Type

J.P. Morgan Chase $100-$265 loan

Bank of America 92-265 loan

Citigroup 51-265 loan

FleetBoston Financial 52-66 loan

Bank One 35-66 loan

Wells Fargo 34-66 NA

Source: Bloomberg News

NA: Not available


Bloomberg News was used in compiling this report.

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