Money and Capital Markets: Corporate Bond Issuance for WorldCom, Inc.

Worldcom, Inc.: Corporate Bond Issuance
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1 Is it a good time to issue? What factors favor issuing now, and what factors do not?
Yes, it was a good time for Worldcom to issue a bond for several reasons. First, the money was intended to pay off another bank debt the company had taken. Bonds are cheaper than bank loans, and in this case, the bond could help repay the loan, hence building its creditworthiness and reducing higher interest debt obligations.
The company was on an aggressive investment strategy. The company had been acquiring and merging with other companies in the industry to become dominant. The merger it was seeking with MCI would have helped the company to become the second-largest telecom company after AT&T. History of the company was healthy, and previous mergers and acquisitions had turned out to be great investments. Thus, it was necessary to move quickly to dominate the market because the Telecoms Act of 1996 rewrote the industry rules. The best way to remain competitive was by infrastructure investment and merging with companies that covered Worldcom’s weaknesses.
A new bond would help Worldcom in the negotiations with MCI. It would give the company leverage to buy out BT’s shareholding capacity in the upcoming merger with MCI giving it a strong asset base and control of MCI. The plan to use the bond to pay off BT and the bank debt seemed reasonable. Since bonds are cheaper and have fewer restrictions than bank loans, they can help raise credit. Any restrictions imposed on new credit would affect negotiations with MCI. After the merger, the companies would have combined revenue of more than $30 billion in 1998 revenues. This shows they do not have going concerns and are in a strong financial position to pay for their interests. Worldcom had reported second-quarter revenue of $2.61 billion, a 45% increase over the same period of the previous year.
Analysts favored the merger. Cassidy, an analyst at T. Rowe, pointed out that the company’s business model and investment were paying off, and customers were seeking companies that gave end-t-end telecommunications solutions. This showed that the upcoming merger was a great idea in the short and long run. It was a model other companies were seeking to emulate. Thus, it is only reasonable that Worldcom raises funds for more investment and merging with companies that helped the company become an industry leader in this area.
The bond would also be reasonably priced since it is a low-risk investment. Moody Investors Service had rated it Baa2 while Standard & Poor’s rated it as BBB+. It was also believed that it would be upgraded to a Single-A in the upcoming year. These valuations by credit rating agencies showed that a stable company issued the bond and it was a low risk; hence it attracted lower interest rates and was marketable in the market.
Negative
One of the factors that make the bond unfavorable to be issued now is the fact that there was a huge merger coming up. It is likely that if the merger went through, it would improve the financial position and improve the bond rating they would issue. Credit rating agencies predicted that the bond would be upgraded to a singl...