Worldcom Bond Issuance Essay

956 Words Sep 21st, 2012 4 Pages
WORLDCOM, INC: CORPORATE BOND ISSUANCE

1. IS IT A GOOD TIME FOR WORLDCOM, INC. TO ISSUE? CONSIDER FACTORS IN FAVOR AND FACTORS THAT ARE NOT IN FAVOR.

Personally I believe that the time is not in favor of WorldCom in undertaking one of the largest bond issues at the time. Even though there are many advantages with proceeding with the issue, I believe that the degree and the uncertainty raised by some of the disadvantages outweigh the advantages of going ahead with the $6Billion bond. In the table below are reflected both the advantages and disadvantages of proceeding with the bond.
Advantages Disadvantage
1. MCI Merger, which would be financed by the issue, boosted investor interest and awareness in the company.
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The company, as per the Treasurer’s plans, will use $1.94B (cash to be paid to BT is $6.94B, which will be financed by the $5B long-term note and the remainder by the $7B revolver facility) of the revolving facility to pay for the acquisition, which in turn $1B will be paid down using the funds provided by the bond. Using short-term financing for long-term projects will be projected as an adverse signal by the investors. This also might reflect that WorldCom has financing issues, given that it is more leveraged than it peers. Also given the tranches offered by the company and their maturities there’s a disproportionate matching with the term of the $5Billion loan, which initially will be utilized to pay for the acquisition.
Provided the high supply of issues in the pipeline and the fact that the $6Billion issue would be the largest in history, WorldCom is facing the possibility of not being able to place the whole issue.
3. HOW DOES FINANCING WITH CORPORATE BONDS TYPICALLY DIFFER FROM A BANK LOAN? EMPHASIZE THE MAJOR UNCERTAINTIES THAT A CORPORATION FACES WHEN ISSUING BONDS?
Normally, a bank loan would be a more expensive option since bonds are typically more liquid than bank loans. Given that fact, they should provide cheaper terms of financing than bank loans. Due to the liquidity aspect, their preference in the market by investors, since they order a broader universe of investors, might provide more favorable or less restrictive covenants for the

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