Updated from 11:59 a.m. EDT
Investors bid up
Monday after the struggling telecommunications firm quelled fears of insolvency by securing a $1.5 billion credit line.
Shares of the Clinton, Miss.-based firm rose 10% to $1.49 on the heels of the news, but several analysts were quick to point out that the company has yet to negotiate a more ambitious $5 billion credit agreement and that it remains hard to see any value in its shares.
"It's not that WorldCom is about to go out of business anytime soon," said Richard Klugman, an analyst at Jeffries. "The question for equity holders is: Is there any value in excess of the face value of the bonds, and we believe no, and that's why we put a sell
rating on the stock."
WorldCom holds about $29 billion in debt but the bond market is suggesting that the firm's assets are worth only $14 billion, Klugman said. "For the equity to have value, the investment community needs to at least double its estimation of the assets."
WorldCom's lenders agreed to reduce the size of the financing program to $1.5 billion after the firm was stripped of its investment grade rating, according to the
The new facility replaces a $2 billion securitization program that allowed WorldCom to raise cash by selling its short-term receivables, such as customer bills.
Last week, WorldCom said it was on track to put a new receivables financing package in place. The company and its banks had faced a deadline of this Thursday to change the terms of the securitization program, after which the company could have faced a default.
WorldCom is also hoping to complete negotiations on a $5 billion long-term loan package by next month.
"As long as they keep the confidence of the banks and the confidence of their customers, they'll do fine. If they can't manage to do those two things, the debt will just crush them," said Rick Grubbs, an analyst at Credit Lyonnais Securities.
Holding on to customers is seen as a key concern among some analysts. WorldCom has announced large spending cuts in an effort to shore up its balance sheet but some observers fear that these cuts will hurt its network and its service, leading to customer defections.
The Wall Street Journal
already has reported that Sprint is getting inquiries from some WorldCom customers.
WorldCom's stock has plunged 75% over the last four weeks, as investors feared the company would have to borrow more money to pay off some $1.6 billion in debts, which come due next year. Concerns about the firm's insolvency began after it slashed revenue forecasts and cash flow estimates amid a sharp downturn in the telecom industry.
The company has seen its stock removed from the S&P 500 index, its debt downgraded to junk status and its longtime CEO Bernie Ebbers resign under pressure from the board.
Still, the stock has rallied over the last few days. Last Wednesday, the cash-strapped telco said it would draw down a $2.65 billion credit line before it expires on June 7 to encourage banks to agree to the new loans. Meanwhile, WorldCom's new CEO, John Sidgmore, has stressed that the company has no intention of filing for bankruptcy and that it has enough cash to weather the downturn.
Tim Horan, an analyst at CIBC World Markets, agrees that the company can survive at least for the foreseeable future.
"They have enough liquidity for the next two years," he said.