WorldCom junk; company to cut capex again

Moody’s Investors Service cut its debt rating on WorldCom three notches, placing the company firmly in junk territory.

WorldCom’s senior unsecured debt was reduced from Baa2 to Ba2, a rating for bonds with “speculative elements” whose future “cannot be considered well-assured.” Its commercial paper was reduced from Prime-2 to Not Prime.

According to Moody’s, the cuts came in response to the deterioration of the WorldCom’s operating performance, its expected weakness going forward, sizable debt maturities coming due over the next two years and its need to restructure its bank facility.

In addition to the drastic cut, WorldCom remains on review for further downgrades. The company, Moody’s said, has few non-core assets that can easily be sold for de-leveraging purposes, and its core businesses will not produce the growth it needs, even following an economic recovery. “As a result,” Moody’s said in its announcement, “ [WorldCom] is not expected to achieve a profile consistent with an investment-grade rating for the next several years.”

Not surprisingly, WorldCom played down the announcement as having no material effect on its operations. After the ratings downgrade was announced, the company put out a press release saying it had received a waiver on a covenant that would have required WorldCom to liquidate its $1.65 billion accounts receivable securitization program upon sinking to junk status.

During a conference call to discuss the downgrade, company executives also gave an update on WorldCom’s financial restructuring. The company is in the process of reworking several credit facilities and analyzing non-core assets for possible sale.

In addition, WorldCom is re-evaluating its capital expenditure budget and will likely make another cut over the next month.

“I think it’s pretty clear that we can get $1 billion out of our current capex,” or more, said John Sidgmore, WorldCom’s newly installed CEO. Any reduction would come out of long-term projects and would be made up for in future budgets, he said.

If WorldCom does implement another capex reduction, it would come on top of the April 19 announcement in which it slashed its capital expenditure budged by $500 million to $4.5 billion. The combined WorldCom/MCI capex budget stands at $4.9 billion.