WORLDCOM, INC: CORPORATE BOND ISSUANCE
Introduction
This case raises many interesting questions concerning the record setting issuance of corporate debt by WorldCom, Inc. (“WorldCom”). Both the surprisingly voluminous structure of the proposed issuance and the foreboding macro-economic climate in which it was slated spark concerns over the risk and cost of the move. One of the first questions that must be addressed is whether WorldCom’s timing was appropriate. Next, the company’s choice of structure for the bond issuance must be analyzed. Finally, the cost of issuing each tranche of debt must be estimated in order to determine how much WorldCom is actually giving up to achieve the $6 billion in funds.
Timing of the Bond
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In addition, WorldCom was not the only company issuing a large supply of bonds at that time. In fact, there were many issues set to hit the market around the same time. The sudden influx of corporate debt into the market would apply pressure on the price of the bonds while granting investors a wide range of opportunity and control. In addition, the economic turmoil in Asia at the time had caused a great deal of uncertainty about the future of the fixed-income market and the overall economy, thus pushing investors towards default-free treasury securities and away from corporate debt.
Structure of the Issuance
WorldCom has the option to extend its bank loan credit facility or to issue this large $6 billion in debt. It plans to use the rolling commercial paper program to pay British Telecommunications for MCI’s share purchases, and then use bond proceeds to pay off the commercial paper program. This signals that WorldCom does not need the money immediately for a single corporate purpose, and does not need the money immediately. Therefore, perhaps it makes sense for WorldCom to issue the bonds in smaller installments rather than flooding the market with $6 billion in debt all at once. The first reason for this is that, if an underwriter must first purchase the bonds before selling to investors, an underwriter may demand greater spread in order to justify taking down an entire $6 billion in debt using the bank’s capital assets. The second
However, this is not the case with WorldCom, as the company apparently has good reputation and can get the required financing through loans. However, with bonds there is less flexibility to resolve any future issues and there is always the pricing risk, but one pro of a bond is that there is no periodical principal payment.
MCI would be better to keep its capital structure of 55% debt. The cost of equity is high because raising more equity will dilute the value for existing shareholders. Due to the fact that MCI has a high leverage, it is not feasible to issue debt. Additionally, MCI has exhausted the line of credit from the banks and used convertible debentures frequently. MCI belongs to a competitive and regulatory industry. The high leverage will limit its potential to grow. In exhibit 8, MCI does not have a bond rating. The convertible bond allowed the company to raise capital and convert to equity later. The interest coverage ratio of AT&T is 3.6X whereas that of MCI is 4.2X. After increasing the market share, the company can obtain a bond rating by decreasing its financial leverage.
The issuance of convertible debt will result in even more cash holdings for Intel, an additional $1 billion. This, at face value, does not solve Intel’s capital structure dilemma of having too much cash. However, Intel can afford to incur more debt financing, since it has relatively low long-term debt. By doing so, its long term debt ratio (using 1991 figure) would change to:
| Objectives are integrated within TV, print and direct mail. Internet focuses on building consumer relationships rather than getting awareness. Bonds did not show any objective on its package design.
Thus, the security is compound financial instrument. If the convertible debt is convertible at the investor’s option, the initial proceeds are divided between the debt element (both principal and interest) and the equity element, the conversion option.
Facts: Five years ago, Lacey, Kaylee, and Doug organized a software corporation, DLK, which develops and sells Online Meetings software for businesses. DLK is a C corporation and each individual contributed $10,000 to the company in exchange for 1,000 shares of DLK stock (for a total of 3,000 shares). The corporation also borrowed $250,000 from ACME Venture Capital to finance operating costs and capital expenditures. It was suggested by Lacey that Kaylee and Doug (original investors) contribute an additional $25,000 to DLK in exchange for five 20-year debentures. The debentures will be unsecured and subordinate to ACME’s debt. Annual
Before Apple Inc. decides to issue bonds in Switzerland, its’ management team has to take a few issues and factors into consideration before authorizing SFr1.25bn worth of debt to be put in the company’s books.
The fact that the analysts particularly concerned about Glent Mount Furniture Company’s growth rate in earnings per share made the CEO Carl Thompson worried. Carl understood the important of the earnings performance to the company’s market value, and looking at the growth rates of the earnings per share for the past five years, he knew that he needs to take action. The consideration of taking $10 million in long-term debt to repurchase 625,000 shares of stock outstanding at $16 per share is on the table. Should he or should he not take this huge debt?
in dividends causing a default on the bonds, bankruptcy, and the collapse of the corporate
Prior to 1980s, DuPont has been well known for its policy of extreme financial conservatism. The company’s low debt ratio was feasible in part because of its success in its product market. In fact, this made them one of the few companies with an AAA rating that allowed it to maximize financial flexibility. We can divide the previous period by the time with conservative debt policy
Gazal, a similar firm, follows the same strategic approach as Billabong taking the advantage of being a levered firm and perceived to having a target ratio. Gazal’s differs to Billabong in the approach of taking higher debt-to-equity ratio. Country Road, another comparable firm, takes on a different capital structure to the others as it recently became an unlevered firm.
Though bonds provide such safety, their yields are very low and have little potential for capital appreciation in the long-run for both the issuer and receiver. Besides, the low interest-rate of bonds makes the return on holding cash virtually non-existent (Voya & Scotia, 2009). Convertible bonds, however, offer a middle ground between the safety of bonds and the upside potential, and risk, of stocks. For this firm seeking income, higher-yielding convertibles bonds are the right options they can explore. This allows for the downside protection of a
Chevron operates in the hydrocarbon industry, where it is one of the world's largest companies with sales of $241.9 billion and net income of $26.18 billion. It is the conclusion of this analysis that a creditor should lend Chevron an additional $20.9 billion. The company has the liquidity, solvency and the cash flow to pay back this amount of debt. The company currently finances its operations largely from operating cash flows, with a small amount of long-term debt. This low debt level has left the company with a balance sheet strong enough to withstand a further $20.9 billion in debt. As a lender, it has been found that Chevron meets all of the lending
U.S. Semiconductor, a semiconductor manufacturer decided to expand their business to UK market in 1980. Their new business plan needed specialized technical support facility in UK. In order to minimize the equity investment, they decided to fund their assets mostly with debt. As Semiconductor owned subsidiaries, which spread all over the world, they face great exchange risk. Besides, instead of building a production department in UK, Semiconductor kept producing their products domestically and delivered them to UK by plane. British firms also confronted exchange risk due to the difference between import costs and sales revenues. This case mainly involves the discussion on the method of debt funding.
If external financing is required, the “safest” securities, namely debt, are issued first. Although investors fear mispricing of both debt and equity, the fear is much greater for equity. Corporate debt still relatively little risk compared to equity because, if financial distress is avoided, investors receive a fixed return.. Thus, the pecking order theory implies that, if outside financing required, debt should be issued before equity. Only when the firm’s debt capacity is reached should the firm consider equity.