Worldcom, Inc.: Corporate Bond Issuance

WorldCom, Inc.: Corporate Bond Issuance

WorldCom is a company which was established in 1983 in Mississippi concentrating on the Long Distance Discount service. Due to the success of acquiring and merging, WorldCom had become the leader in 1996 after the acquisition of the American Online networks and CompuServe networks. Since the aggressive market strategy, WorldCom continuing have the large amount needs to fund future acquisitions and large-scale capital improvement.

In January 1998, WorldCom sought to raise a $6 billion bond in one shot. The surprisingly voluminous structure of the issuance would spark concerns. But the current concession market economic condition could be a very important factor. There are many reasons which could impact the at-issue yield-spread of WorldCom’s debt at the time of debt issuance, including the great company economic condition, the leader position, the higher credit rating and the well financial performance.

To discuss whether the time is the most suitable time for WorldCom to market such a large bond issuance, there are many different aspect of factors both contain the advantages and the disadvantages. As for the advantage factors, the MCI merger has boosted the awareness and interest of the public to the firm. At that time, many observers viewed WorldCom as the industry leader. Also, there is another important positive factor which is the upgrade credit rating. The WorldCom credit rating, which was currently rated Baa2 by Moody’s Investors Services and BBB+ by Standard & Poor’s, would upgrade to A- area in the upcoming year. This would enable the company to borrow money at a lower rate. Finally, the market condition is not optimistic. The Asia economic crisis raised the negative effect all over the world. The investors shifted their investment from equities to treasury and corporate bonds. So, it should be an opportunity to drawing more interest in WorldCom.

However, there still some disadvantages of the time of debt issuance. The Asia economic crisis also caused some uncertain and risk about the future of whole industry. So, the crisis also raised concerns among investors about the quality of debt. Besides, at that time, the spread over treasuries had increased, which granted the investors the ability to demand more return.  

The covenants in Exhibit 2 gives some current debt issuance covenants, including the limitations on additional indebtedness. In this case, WorldCom has the option to extend its bank loan credit facility or to issue the 6 billion bonds. They plan to use commercial paper to pay MCI’s share purchase, and use debt to pay commercial paper. It is the action breach the limitation on additional indebtedness.