Ok, anyone else other than me think that dabbling in Worldcom bonds might be worthwhile? I have been looking over them and have seen some as low as .16 on the dollar. Now my reasoning is that just because Worldcom overstated earnings it still might not go into BK. Even if it does go into BK, the bondholders still might walk away with more than .16 per bond, maybe. I figure its not like WCOM just added 4 billion to earnings they simply (ehh well not so simply)reconfigured maintenance charges as capex. So maybe after the dust settles and after disposing of a few assets here and there, they can keep their head above water for a year or two, long enough to squeeze out some interest payments on those bonds. MCI is a valuable telco and now that they won't have to pay that outrageous dividend that will be another 200 million(yea, chump change I know)or so a year to help stave off BK. Just a random thought, now that AT&T is nearly dead, WCOM is nearly dead, Qwest is dying, Broadwing is sinking, who will scoop up all the goodies? Level Three? Verizon? Bell South? SBC? Cable companies? A Berkshire telco in the works?(nah, not likely to capital intensive).
I can't figure out WCOM debt pricing. Even if you think BK is imminent (I do) they look absurdly cheap. Even if you think the banks will finagle their way from a parri passu position vis a vis the bonds to a secured or senior position (I think they will), the bonds still look cheap. Even if you figure there's more fraud yet to be uncovered (I don't), they're still cheap. I just don't get it.
FWIW, there's no reason for WCOM to fight off BK for a year or two. If they're going to file anyway it's best to do it now and conserve all that cash currently pouring out the door in the form of interest payments.
The WCOM bond prices are intriguing.The pricing would in part reflect the unquantifiable exposure WCOM has to civil claims from banks,bondholders etc.resulting from their fraudulent financial statements; and the uncertainty as to where on the pecking order any particular bond issue may rank with respect to these claims.I would think WCOM employees have massive claims arising out of the alleged fraud---both as to their salaries and as to their pensions, particularly that portion of their pension invested in WCOM securities.Where do various debt issues rank relative to these claims?
Pros in this area like Carl Icahn, Leon Black etc. will no doubt be looking long and hard with these bond prices.If they had a fund that focused solely on these situations I'd rather invest via their fund, as the litigation risks require some serious expertise to evaluate.
In Security Analysis, Graham mentioned that bond investors are no brighter than stock investors when it comes to irrational fear. He stated that often companies in Receivership sell way below there fair value. Fisk Rubber was an example he used. It was in receivership. The company's bonds and debentures (unsecured debt) were selling for a grand total of $2,100,000 with the common stock basically at zero. So $2.1 million was the total market value of the company.
But the company had $7.7 million in cash, $4.8 million in receivables, and $3.2 million in inventories. Subtract the $363,000 in Accounts Payable and the co.'s Net Current Assets were still $15.3 million. So the bonds/debentures were selling at a fraction of Net Current Assets and for less than 1/3 of the cash alone.
If you add in the $23 million in fixed assets, all the bonds and debentures were going for just 1/18th of the existing assets on the balance sheet.
I don't think that irrational fear was limited to investors in the 1930s. So if you think WCOM debt is absurdly cheap, you are probably on to something.