On June 17, Standard & Poor's lowered the long-term corporate credit rating on WorldCom Inc. was lowered to 'B+' from 'BB.' The ratings remain on CreditWatch negative due to the company's anticipated delay in obtaining an approximately $5 billion bank facility, increased refinancing risk associated with large debt maturities commencing in 2003, and the continued weak environment for long-distance services, says analyst Rosemarie Kalinowski.
In addition, the company's confirmation that it will further cut capital spending by $1 billion in 2003 and reduce its workforce by 20% could negatively impact future growth prospects. Clinton, Miss.-based WorldCom had about $30 billion total debt outstanding as of March 31, 2002. (WorldCom's credit has been rated junk by Standard & Poor's since May).
In May 2002, WorldCom fully drew down its $2.65 billion bank credit facility that terms out in June 2003. At that time, the company indicated that it intended to obtain a larger term secured facility. Standard & Poor's is concerned about the potential delay in obtaining the new bank facility because of its impact on the company's liquidity position over the next year. Composition of the financial covenants in this facility will be essential to improving WorldCom's liquidity position as debt totaling more than $9 billion over the next three years comes due. The bank facility is also a major factor to reestablishing investor confidence and access to the capital markets.
Even if the bank loan is successfully negotiated, Standard & Poor's is concerned about WorldCom's asset valuation in relation to its total debt outstanding, as the demand for long-distance voice and data services continues to be impacted by a slow economic recovery, technology substitution, and competition. In addition, because of its debt load and excess long-haul capacity in the market, the potential of being acquired by a financially stronger entity is limited in the near term.
In resolving the CreditWatch listing, Standard & Poor's will review the terms of the new bank agreement. In addition, unless the company presents a credible plan to meet upcoming maturities, ratings could be lowered further. Depending on the terms of the credit facility security, unsecured issues could be notched below the corporate credit rating.
From Standard & Poor's RatingsDirect