WorldCom's Junk Status Fuels Fears

Tough times just got tougher for WorldCom Inc. (Nasdaq: WCOM), as three debt-rating services lowered their opinions on the quality of the company's bonds.

Last Thursday, Moody's Investors Service and Fitch Ratings lowered their assessment of the likelihood of investors getting a return on the beleaguered carrier's debt and commercial paper. On Friday, Standard & Poors followed suit.

The latest news is a blow to WorldCom supporters who say fears of bankruptcy are overblown. The telecom company has plenty of operating cash for 2002, but many experts see cash flow problems down the line as debt payments mount (see Is It Too Late to Rescue WorldCom? ).

WorldCom's debt level was a red flag in a recent report by the Optical Oracle, Light Reading's subscription research service. The "Carrier Crisis Report" linked WorldCom's sizeable increase in debt over the past year with incipient downgrades.

Moody's lowered its rating of WorldCom debt three notches to Ba2 from Baa2, and the service warned that more downgrades might be in the offing on the carrier's long-term debt, which is separately rated. Fitch Ratings moved its call on WorldCom's debt to B+ from BB+ (see Fitch Downgrades WorldCom). Standard & Poor's lowered its long-term corporate credit rating for WorldCom from BBB to BB and its short-term rating to B from A-3. The agencies also lowered their ratings on WorldCom's commercial paper: Moody's dropped to Not Prime from Prime-2 (a medium-grade rating), and Fitch went to B from F3.

The new ratings put WorldCom's debt into "junk" status, a move that could hinder WorldCom's ability to borrow money against it in the near term.

"This is a high-yield, speculative rating," says David Peterson, a director at Fitch. "And yes, it could hinder the company's access to capital markets." Also, he says, some investor pools are constrained from dabbling in bonds that fall below a certain rating.

Indeed, the Moody's downgrade triggered several actions. First, it sent WorldCom's stock plummeting. On Wednesday, shares were trading at over $2.25. As of Friday (May 10), they were already at $1.67, down $0.339 (16.87%) on the day. WorldCom has also been compelled to obtain a waiver from lenders that secure the carrier's accounts receivable securitization program (see WorldCom Gets A/R Waiver). That program, which enables investors to speculate on the outstanding accounts receivable at WorldCom, was apparently set to unravel if that Moody's ratings went below a certain level.

The rating downgrade also appears to have accelerated a further cut in capital spending. On a conference call last night, executives indicated that another $1 billion will be trimmed off the budget this year.

This news heaps more grief on WorldCom's already beleaguered business, and any hindrance to the company's ability to borrow or secure new credit will add even more pain.

All three ratings services say they need to see sizeable improvements in WorldCom's financials before reconsidering the downgrade actions. Moody's wants to see WorldCom "take corrective action to generate cash in order to address its upcoming debt maturities and reduce its debt burden." The service is pessimistic about any such action taking place: "[T]he company is not expected to achieve a profile consistent with an investment grade rating for the next several years," Moody's prepared statement says.

Fitch says WorldCom needs to see improvement in the market for the carrier's services before things look up. "The prospects for turnaround hinge on the company's ability to drive its data and Internet businesses and see some return on growth," David Peterson says. "It keys on a return of spending in the business and enterprise markets that WorldCom serves."

Standard & Poor's says WorldCom faces its financial problems along with rising competitive pressure -- a particularly wicked combination. "New management may be able to craft a strategic approach that more effectively positions WorldCom to leverage its formidable network assets and capabilities," the service says in a prepared statement. "Nevertheless, the challenges are formidable."

Today (Monday, May 13), WorldCom stock is trading at $1.522, down $0.058 (3.67%).

— Mary Jander, Senior Editor, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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