Worldcom Inc. – Corporate Bond Issuance

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4.WorldCom issued $6 billion in one offer in that time which is very risky. Don’t put all your eggs in the same basket. In my opinion, WorldCom did not follow an appropriate financial strategy in terms of facts available at the time. It can use the portfolio to spread the risk and raise the funding through several small offers.

Using smaller offers to raise the fund is a more stable way.

Here, I can show some examples of the alternative plan.

- The Domestic Bank Loans-U.S. market is safe to have and WorldCom can take a small amount of bank loan from the domestic bank.

- International Bank Loans-Many companies were taking advantage of lower rates abroad in the 1990’s.

- Corporate bonds-debt was expected to neglect to A area. Use several small offers.

- Commercial Paper-WorldCom didn’t have to register with SEC.It can cause as a short-term financing tool.

5.The issue called for four tranches of debt to be offered:

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When we review the covenants on the credit facility and proposed public bond issue, we may find there a lot of limitations to guarantee the bond safety. To be specific, it has announced the limitations on the merger, liens, additional indebtedness, asset sales and restricted payments. When the bond became safer, it brings more restrictions to WorldCom which can reduce its flexibility and performance.

6.When we look at the company performance at that time, the purchase of MCI would have brought WorldCom from 4th to 2nd in the U.S. market. The combined company, MCI-WorldCom, would have more than $30 billion in 1998 revenues. Although the financial crisis happened in Asia which brings U.S. market a lot of stresses, the market is confidence in the telecom industry. According to the open data, we analysis the stock-price response to recent telecommunications mergers (1998). It's not surprising to find WorldCom draws a lot of attention from the market and its share price and industry index increase a lot.

After the financial crisis, the moderate inflation and slow depreciation give investor motivation to invest their money. Investors in the market are looking for investments which are high profits and low risks. It would be better if they could earn high profits in a short term investment.

Due to the information asymmetry, investors rely on the debt rating agencies. They try to review the company’s financial report, stock market performance and make the decision.

However, it will be a false to 100% rely on the rating agencies. The issuers have to pay the credit rating agencies to rate their debts. Politics issues may also affect the rating. The subprime crisis happened and most of the highest rating securities end up to the lowest rating securities. Debt rating and covenants provide some direction to investor and protect them from losing money to a certain degree. In this case, credit facility covenants have limitations on additional indebtedness and asset sales and disposition of asset sales proceeds. But a lot of issues may affect the investment in capital markets.

7.In my opinion, the market is not failing in this case but has a lot of functions to be improved.

WorldCom’s business strategy makes it into an aggressive expansion market. It creates a lot of bubbles and neglects the importance of technology innovation. The incomplete or distorted information disclosure may mislead the investor and the beginning. However, they borrow big and go into bankrupt which is determined by the market. In my opinion, the market should have more regulations in auditing, investment banks, and credit rating agencies. Try to find a balance between earning profits and sustain fairness and justice as a third party. It’s important to build an open and well-regulated platform. Change offers an opportunity to shorten our response time to market changes considerably.

8.In small pictures, WorldCom is most responsible for the mess (45%). It’s wrong business strategy and risky financing strategy causes the market failures. Followed by the investment bank (25%) and the rating agencies (25%). They are profit-oriented and touted WorldCom as a healthy growth company. Investors (5%) in this case is also blind. They rely on the authority and don’t have their own judgments.

In the big pictures, an investment bank (35%) and rating agencies (35%) are the ones to blame. Market disorder creates some loopholes, which can be used by the speculators. Companies like WorldCom (30%) are hooked on expansion and want to have a piece of pie from the bubbles. Finally, innocence investors are hurt by this market.