WorldCom plunges on accounting debacle; Alliance Laundry, Cinemark meetings Thursday

By Sara Rosenberg

New York, June 26 - Bank loan market participants spent the day focusing on WorldCom Inc. as news of restated earnings hit the market in full force, pushing prices on its paper into the mid-teens. The large accounting discrepancy is expected to have a negative impact on the company's negotiations for a new $5 billion credit facility, according to market sources, and speculation circulated on a possible bankruptcy filing.

Meanwhile, primary activity will pick up Thursday with the launch of two deals led by Lehman Brothers. Alliance Laundry Systems LLC will hold a bank meeting for a new $243 million credit facility and Cinemark Inc. will hold its bank meeting for a new $250 million credit facility.

WorldCom announced on Tuesday evening that because of transfers discovered in an audit the company will restate its earnings, reducing EBITDA by $3.055 billion in 2001 to $6.339 billion and $797 million in the first quarter of 2002 to $1.368 billion The Securities and Exchange Commission is investigating the matter and the Justice Department is also getting involved.

"I wouldn't want to be one of the lenders holding the bank debt," an investment banker said. "I think the next thing they'll be working on is a debtor-in-possession facility. I don't think there will be a $5 billion credit facility."

The bank debt traded at 22 Wednesday morning and continued to drift lower to finish the day in the mid-teens, the investment banker added. On Tuesday, the loan was trading in the high 70s.

"I got to believe that the banks are shocked by this and I don't think that's good for negotiations," a portfolio manager said. "I haven't seen bank debt quoted but I've seen quotes on the bonds all day. General quotations on the bonds were in the teens."

WorldCom is currently involved in negotiations to replace its existing bank loans with a new $5 billion credit facility. Earlier this month Susan Mayer, senior vice president and treasurer, said the Clinton, Miss. communications company needs to raise an additional $300 million from banks in order to reach the $5 billion level for its new credit facility. Lead banks have already committed about $450 million of new money to the deal, Mayer added. The new credit facility had been expected to be secured, ranking it ahead of the company's bonds, unlike the existing facility which is unsecured.

Also announced late Tuesday was the termination of Scott Sullivan as chief financial officer and secretary and accepted the resignation of David Myers as senior vice president and controller.

Trading of WorldCom stock on the Nasdaq was halted Wednesday at a last price of $0.83. The company's 52-week high is $16.06 and 52-week low is $0.79. "Trading will remain halted until each company has fully satisfied Nasdaq's request for additional information," a press release said.

"Our senior management team is shocked by these discoveries," said John Sidgmore, chief executive officer, in a press release Tuesday. "We are committed to operating WorldCom in accordance with the highest ethical standards."

"I want to assure our customers and employees that the company remains viable and committed to a long-term future. Our services are in no way affected by this matter, and our dedication to meeting customer needs remains unwavering," added Sidgmore. "I have made a commitment to driving fundamental change at WorldCom, and this matter will not deter the new management team from fulfilling our plans."

All three rating agencies downgraded WorldCom's ratings Wednesday in response to the overstatement of EBITDA numbers.

Moody's Investors Service downgraded WorldCom's senior unsecured debt to Ca from B1. "Moody's downgraded WorldCom's debt rating due to our concerns that 1) the company may not be able to recover from the accounting fraud allegations, 2) accounting irregularities and fraud accusations make the successful renegotiation of the bank facilities unlikely, 3) the company is now unlikely to be able to draw down on a key source of liquidity, its $1.6 billion bank facility, 4) even if debt is not accelerated, WorldCom's current cash position and cash generating capability would likely be inadequate to cover its debt maturities in early 2003, and 5) material numbers of current business customers may begin to migrate to other carriers," Moody's said.

Standard & Poor's downgraded WorldCom's corporate credit rating to CCC- from B+, with all ratings remaining on CreditWatch with negative implications. "The downgrade is based on the high degree of uncertainty surrounding WorldCom's ability to ultimately pay its outstanding debt," credit analyst Rosemarie Kalinowski said. "Furthermore, the restatement and the expansion of the SEC investigation could adversely impact the current bank negotiations and the company's ability to retain customers. These events increase the likelihood of a debt restructuring or Chapter 11 filing near term."

Fitch Ratings downgraded WorldCom's senior unsecured debt to CC from B. "While additional disclosures will elaborate on the extent of the accounting irregularities, potential covenant violations and a protracted legal and regulatory aftermath heighten an already tenuous financial condition," Fitch said. "Given its debt burden, the uncertainty over obtaining additional bank financing, and a total of $5.8 billion in debt maturities in 2003 and 2004, Fitch believes a debt restructuring is highly probable."

Due to WorldCom's troubles, the telecommunications sector as a whole suffered, a market professional said. For example, Nextel Communications Inc., a Reston, Va. wireless phone company, was bid at 73 and a trade was executed at 78 on Wednesday morning, well down from quotes in the low 80s on Tuesday.

"No one wants telecom or cable," a market professional commented.

Coming up on Thursday is Alliance Laundry Systems' bank meeting regarding its new $243 million credit facility (B), which will be used to refinance existing debt, according to market sources. The Ripon, Wis. commercial laundry manufacturer's loan consists of a $193 million five-year term loan B with an interest rate of Libor plus 350 basis points and a $50 million five-year revolver with an interest rate of Libor plus 350 basis points, market sources said.

"Alliance Laundry has struggled in the past," a fund manager said. "The company has stabilized and improved their EBIDTA margin but revenues are still shrinking. I'm not very interested."

However, the company is probably counting on the fact that people would rather agree to the refinancing then lose the asset in this market where supply is scarce, the fund manager added.

Also on Thursday is Cinemark Inc.'s bank meeting for a new $250 million credit facility (BB-), according to market sources. The Plano, Tex. movie theater operator's loan consists of a $150 million six-year term loan B with an interest rate of Libor plus 300 basis points, a fund manager said, and a $100 million five-year revolver with an interest rate of Libor plus 300 basis points. Proceeds, combined with proceeds from an initial public offering will be used to refinance existing debt.

"Cinemark is going to a very select group of institutions," the fund manager said. "Only five accounts per salesperson can be invited. The deal is seen as a slam dunk."

Swift & Co. held a bank meeting Wednesday regarding its new $550 million secured credit facility, which "went extremely well", a market professional said. Citibank and JPMorgan Chase are the lead banks on the deal.

"They had good commitments going into the meeting," the professional said. "My understanding is that the deal hit the sweet spot."

The loan consists of a $350 million revolver with an interest rate of Libor plus 325 basis points and a $200 million term B with an interest rate of Libor plus 325 basis points, market sources said. It's a secured deal that is structured as an asset-based loan with borrowings tied to 85% of eligible accounts receivable and 70% of eligible inventory. The company's senior leverage is 1.2 times and total leverage is 2.9 times.

Proceeds from the loan will help finance the leveraged buyout of Conagra Foods Inc.'s beef and pork processing business by private equity sponsors Hicks, Muse, Tate and Furst.

In follow-up news, Boyd Gaming Corp. completed and funded its new $500 million credit facility (Ba1/BB+), according to a company press release. The loan consists of a $400 million five-year revolver with an interest rate of Libor plus 250 basis points and a commitment fee of 50 basis points and a $100 million six-year term loan B with an interest rate of Libor plus 250 basis points. Proceeds were used to refinance the company's previous facility that was maturing next June. CIBC World Markets was lead arranger and administrative agent. Other agents involved in the transaction include Bank of America, Credit Lyonnais, Deutsche Bank and Wells Fargo.

Technical Olympic USA Inc. closed on its new $220 million three-year senior secured revolver (Ba3) with an interest rate of Libor plus 250 basis points. Salomon Smith Barney acted as lead arranger, Deutsche Bank was co-arranger and syndication agent, Citibank was administrative agent and Fleet Securities was documentation agent and co-arranger. The Sugar Land, Tex. homebuilding company's loan is secured by capital and stock of all subsidiaries. Proceeds helped fund the merger between Newmark Homes Corp. and Engle Holdings Corp.

Encore Acquisition Co. entered into a new $300 million revolving credit facility, according to a company press release. The Fort Worth, Tex. independent energy company's new loan matures on June 25, 2006. Interest rates on the loan vary depending upon the amount of funds borrowed, according to a company spokesperson. If less than 25% is used the spread is Libor plus 100 basis points. If more then 25% but less than 50% is used the spread is Libor plus 112.5 basis points. If more than 50% but less than 75% is used the spread is Libor plus 125 basis points. If more than 75% but less than 90% is used the spread is Libor plus 150 basis points. And, if more then 90% is used the spread is Libor plus 175 basis points, the spokesperson said. Security is a first priority lien on proved oil and natural gas reserves. Fleet National Bank acted as administrative agent for the deal.

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