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WorldCom's Tumble Leads Junk Bonds to Worst Monthly Showing
Thursday, June 27, 2002
(15:23)
By Heather Landy
Bloomberg

“When WorldCom got downgraded to high-yield, we looked long and hard at it because it's such a large percentage of the index,” Brendan White said. “We might have unwittingly been making a bet against WorldCom in a big way.”

NEW YORK -- Bloomberg
Junk-bond investors are having their worst month ever, with falling prices for WorldCom Inc. helping to erase about $24 billion of market value.

A Merrill Lynch & Co. index of 1,351 junk-rated issues has lost 6.52 percent in June, including price changes and interest, surpassing the 6.42 percent drop in September after the terrorist attacks.

More than half the drop came yesterday, following WorldCom's disclosure it hid $3.9 billion of costs. Notes and bonds of the No. 2 U.S. long-distance telephone company shed $7.6 billion of market value and set off a 3.9 percent fall in Merrill's High Yield Master Index, the steepest one-day decline in the benchmark's history.

“It's a demoralizing blow to the marketplace,” said Steven Hornstein, head of high-yield trading and sales at Imperial Capital, which specializes in junk and distressed debt.

Merrill's junk-bond index, valued at $303.5 billion, has returned an average 7.35 percent a year since 1995. Monthly high-yield returns have ranged in the past six months from 3.5 percent in November to a loss of 1.3 percent in February.

Losses on WorldCom, which joined the junk index on June 1 after the company's credit rating was cut from investment grade by Standard & Poor's, Moody's Investors Service and Fitch Ratings, aren't limited to high-yield investors.

The California Public Employees' Retirement System, the biggest U.S. pension fund, said it has lost $330 million on WorldCom bonds, which fell to as little as 11 cents on the dollar from as much as 78 cents the day before. Citigroup Inc., a market maker in WorldCom bonds, said it could lose as much as $375 million on WorldCom stock and debt.

* `Huge Amount'
* Trimming Forecasts
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2002 © Bloomberg L.P.

Dan