Worldcom Case Study

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UV0267

Rev. Oct. 28, 2009

WORLDCOM, INC.: CORPORATE BOND ISSUANCE

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Gary Brandt, treasurer of WorldCom, Inc., could not remember a year quite like the last.

WorldCom had stunned the financial community in November 1997 with a $37-billion bid for

MCI Corp., besting rival bids by British Telecommunications (BT) and GTE. Now WorldCom

was about to do the same in the corporate bond market as it readied to issue what could be the

largest corporate debt issue ever. With the MCI deal scheduled to close soon, financing had to be

arranged to repurchase the 20% stake BT held in MCI. WorldCom announced, through its

investment banker, Salomon Smith Barney, intentions to market $3 billion to $4 billion of debt

in the first week of August 1998. If there was sufficient demand, the offering could be increased

to $6 billion, exceeding by a considerable margin the previous record of $4.3 billion, set by

Norfolk Southern Railroad in May 1997.1 The market reception and pricing of the bond were

made more difficult by the turbulent conditions in the bond and equity markets in recent weeks.

Brandt had received some preliminary estimates of the costs of the issue from his bankers. But

because it would be the firm’s task, not the bankers’, to see that the terms of the debt were

eventually met, he decided to develop his own estimate of the costs of the new bonds.

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WorldCom was started in 1983 in Hattiesburg, Mississippi, as Long Distance Discount

Services (LDDS) by Bill Fields and a group of investors that included Bernie Ebbers.2 The

breakup of AT&T, in 1983, encouraged other companies to enter the long-distance telephone

business. LDDS leased a Wide Area Telecommunications Service (WATS) line and resold time

to other businesses. The firm initially did well until WATS line prices increased.

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If successfully completed, the WorldCom offer would also overshadow the largest junk-bond offering: RJR

Holdings Capital’s $6.11-billion deal priced in 1989. Because...