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Navigating the credit minefield

WorldCom symbolizes the pitfalls of the current market

WorldCom could not have hit the world's credit investors harder. Bond markets bounced back just two weeks after Enron's demise but Enron only had $5 billion to $6 billion in debt outstanding. WorldCom's bonds alone have a face value of $29 billion. Investors were already suffering from a US telecoms meltdown, which forced WorldCom bonds down to junk levels. But then WorldCom euro-denominated bonds fell to just 11% of face value on June 26, the day after the fateful earnings restatement, with $16 billion to $17 billion wiped off their value in a single day.

The results have been painful, even in Europe. In the synthetic CDO sector alone, 58 CDOs in the US and Europe had a par exposure to WorldCom bonds of around $1 billion, according to Moody's, with 30% of this euro-denominated. Nearly all the investment-grade cashflow CDOs rated by Moody's also had exposure. "WorldCom was mostly bond funded," says one market player. "If you had to pick a telecom that would have global impact, that would be it. It did have a truly global impact on portfolios and CDOs but then investors already knew they had problems."

Perhaps fund managers still holding WorldCom paper should have expected a rough ride.

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