S&P May Cut WorldCom Debt Rating

The warning capped a bad week for WorldCom, whose shares have fallen 92 percent on a split-adjusted basis in the last three years. The Clinton, Mississippi-based company faces questions about its accounting and loans to Chief Executive Bernard Ebbers, issues being explored by the U.S. Securities and Exchange Commission.

S&P warned it may cut WorldCom's "BBB-plus" long-term and "A-2" short-term credit ratings, its third- and second-lowest investment grades. The review of the short-term rating suggests S&P may cut the long-term rating at least two notches. WorldCom had about $30 billion of debt as of Dec. 31, S&P said.

"We anticipate that revenue growth in the long-distance voice and data business will continue to be depressed in 2002 due to the economy and wireless/E-mail substitution," wrote S&P analyst Rosemarie Kalinowski. "In addition, competition from the regional Bell operating companies will increase."

WorldCom shares tumbled 20 percent this week, hitting a record low of $4.40 on Wednesday. The 20 percent decline on the week came despite a rebound of 24 cents, or 5 percent, Friday for a closing price on the Nasdaq of $5.01. Trading volume topped 76 million shares Friday.

Many other telecoms suffered this week from concerns about profits, revenues, cash flow and accounting. Shares of AT&T , Lucent Technologies , Nortel Networks and Qwest Communications International all are trading near multi-year or all-time lows.

WorldCom shares have fallen on fears the company will post gloomy first-quarter results, may combine its tracking stocks -- WorldCom Group, the company's main data and Internet operations, and MCI Group , the long-distance phone business -- and may cut MCI's dividend.

WorldCom spokesman Brad Burns declined to comment on S&P's action. MCI shares closed Friday on the Nasdaq at $4.72, up 64 cents, or 15.7 percent, but fell nearly 14 percent this week.

BONDS TRADE LIKE JUNK

WorldCom's bonds are now quoted by price, like junk bonds, rather than by their yield margin over similar maturity U.S. Treasuries, like investment-grade bonds.

"Bondholders often lose confidence when equities become weak, which is a case now involving WorldCom," said John Rahill, a portfolio manager who helps invest nearly $1 billion for Smith Affiliated Capital in New York, and owns less than $1 million of WorldCom bonds.

The company's 7.5 percent notes maturing in 2011 were bid Friday afternoon at 77 cents on the dollar, unchanged from Thursday, to yield 11.67 percent, or 6.51 percentage points more than Treasuries.

"Fear dominates valuations right now," said Gary Pzegeo, who helps invest $4.5 billion for Gannett Welsh and Kotler in Boston and does not own WorldCom bonds. "The fear is based on the SEC investigation and general weakness in the sector. For WorldCom, there is also the fundamental risk because the long-distance business is under volume and pricing pressure.

"At these dollar prices," he added, "it puts WorldCom on a par with a mid- to low 'single-B' rated bond."

Moody's Investors Service warned on Feb. 7 it may cut WorldCom's "A3" senior debt rating, which is one notch above S&P's "BBB-plus" rating. WorldCom is the 10th largest U.S. corporate debt issuer, according to Lehman Brothers

REUTERS

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