CHICAGO, May 18 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has
assigned a rating of 'A-' (Single-A-Minus) to WorldCom Inc.'s (WorldCom)
expected issuance of $3.5-4 billion of multi-tranche senior debt. The proceeds
are expected to be used to reduce the company's outstanding commercial paper
balance. DCR reaffirmed the credit ratings of WorldCom on October 5, 1999
following its announcement to merge operations with Sprint Corp. (Sprint) in
an all-stock transaction. The companies expect that this merger will be
completed in the second-half 2000. DCR has a senior debt rating of 'BBB+'
(Triple-B-Plus) for Sprint Corp, which is on Rating Watch-Up pending the
completion of the merger. The Rating Outlook for WorldCom is stable.
WorldCom's rating reflects the company's strengthening competitive
position and steadily improving financials. The company has experienced strong
EBITDA growth led by its expanding data, Internet and international
operations. The revenue contribution of WorldCom's data, Internet and
international operations are expected to grow 32 percent in 2000. Due to this
success, the company will spend approximately $5.7 billion of its $8 billion
capital expenditure budget in these areas.
The rating also considers WorldCom's pending merger with Sprint that is
expected to create a company with pro forma revenues of more than $73 billion
in 2001 and EBITDA in excess of $25 billion. WorldCom has indicated that cost
synergies of $2.1 billion will be achieved in 2001 and that this level will
increase to approximately $3.35 billion annually by 2004. Cost savings will
be the result of lower line costs, driven in part by access cost savings along
with SG&A, interest and depreciation savings. Future revenue and EBITDA growth
is expected to be materially enhanced by Sprint PCS, which completed the
first-quarter 2000 with 6.5 million subscribers and $1.2 billion of quarterly
revenues. Sprint PCS has announced an expectation to be EBITDA positive in
second-half 2000. The company expects to have more than 10 million
subscribers by yearend 2000. It is expected that the combined companies will
generate solid double-digit EBITDA-to-interest coverage and debt-to-EBITDA
leverage of approximately 1.9 times in 2001.
A developing issue for this credit is the asset divestiture requirements
that will be imposed by the European Commission (EC) and the Department of
Justice (DOJ) to gain approval for this merger. It is expected that
resolution of this issue will be complete in June 2000 and that the most
significant asset divestiture requirement will surround the combined companies
Internet position. The likely resolution would include the requirement to
sell Sprint's Internet backbone operations, which would allow the company to
keep its stronger UUNET division. It is noteworthy that asset sales that
would not materially affect the competitive position of the company could
generate substantial cash that could further enhance this credit.
This merger will combine two very strong telecommunications competitors
and creates a complete service portfolio that can target all levels of
customers. DCR expects that the completion of this merger, absent any
material merger-related conditions or divestitures, along with the realization
of some degree of cost synergies will likely result in upward movement in the
credit.
WorldCom reported approximately $10 billion of revenues in first-quarter
2000. Likewise, Sprint reported consolidated revenues of approximately $5.57
billion in first-quarter 2000.
SOURCE Duff & Phelps Credit Rating Co.
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