Worldcom Case

1. WorldCom Inc.: Corporate Bond Issuance

1- Is it a good time to issue? What factors favor issuing now and what factors do not?

2- What risks does WorldCom face in issuing up to $6 billion in debt? How will investors and the market react to the large size of the offering? Would a series of smaller issues be a better strategy?

3- How does financing with corporate bonds typically differ from a bank loan? What are the major uncertainties that a firm faces when it issues securities?

4- Estimate the expected costs (percentage yields) that WorldCom will incur on the 3-,5-,7-, and 30-year notes. How would you attempt to explain to someone who is unfamiliar with credit markets why the bonds should be priced in this manner?

1) Is it a good time to issue? What factors favor issuing now and what factors do not?

WorldCom could choose not to issue bonds considering the prevailing volatile economic climate at that time. Volatile international markets coupled with a projected slowdown in the American economy could make the debt issuance risky. There were indicators at that time of a potential slowdown in American corporate profitability in the second quarter of that year. Political uncertainty in the US at that time, adds to the conundrum. Additionally, some $40 billion of debt issuance was scheduled to price, the same week that WorldCom was looking to issue its debt which could lead to market saturation in terms of investor demand to purchase debt. WorldCom’s goal of a single $6 billion debt issue might be too large when considering above mentioned economic and political uncertainties.

On the other hand, Moody’s and S&P are expected to raise WorldCom’s debt from Baa2 and BBB+ to the low single A area in the coming year. This is a vital indicator that WorldCom’s debt is relatively secure. Although $40 billion in debt issuance is scheduled to price the same week that WorldCom intends to issue its debt, WorldCom’s higher debt rating should...