WorldCom Inc. filed the largest US bankruptcy on Sunday after the long-distance telephone and data services company buckled under a US$3.85 billion accounting scandal and a mountain of junk-rated debt.
WorldCom's accounting debacle has deepened investor unease on Wall Street in recent weeks, sending markets to their lowest level since 1998, and prompted President Bush to call for a government crackdown on unethical business conduct.
"Because we're going to restructure our balance sheet and reduce our debt, we think we can emerge from the Chapter 11 process a stronger and healthier company," WorldCom Chief Executive John Sidgmore said in a telephone interview.
WorldCom, which has 60,000 employees and operations in 65 countries, said it expects to hire a restructuring expert to aid the current management team, and it aims to emerge from Chapter 11 in about nine to 12 months. The bankruptcy does not include its international operations.
The company, which has more than 20 million customers and transmits half the world's Internet traffic, said it will have access to up to US$2 billion in debtor-in-possession (DIP) funding to keep operating, maintain its network and pay employees under the bankruptcy reorganization.
The Clinton, Mississippi-based company plans to appear at the U.S. Bankruptcy Court for the Southern District of New York on Monday to seek approval for the DIP funding.
The trouble at WorldCom, which listed US$107 billion in assets and US$41 billion in debt, followed that suffered by high-flying companies like energy trader Enron Corp. and Global Crossing Ltd., which crumbled into bankruptcy amid a crush of accounting investigations by federal regulators.
WorldCom last month disclosed it improperly recorded US$3.85 billion in expenses and fired its former chief financial officer, Scott Sullivan, who it alleged orchestrated the accounting debacle.
Former chief executive Bernie Ebbers resigned under pressure in April. WorldCom was charged with fraud by the U.S. Securities and Exchange Commission and faces lawsuits from several state pension funds, which alleged it provided misleading information during a 2001 bond offering.
DEBT-FOR-EQUITY SWAP EXPECTED
The company expects to reduce its debt through a debt-for-equity swap that would give bondholders an ownership stake in the reorganized company, Sidgmore said.
"We've had very positive conversations through our lawyers and bankers with the bondholders so far. ... I think we're going to be able to convince people that owning our equity is a good deal. As we emerge from bankruptcy stronger I think the company will have very good prospects," Sidgmore said.
In a statement, the major bondholders of WorldCom and its subsidiaries said they would cooperate with the company and supported "immediately moving toward a reorganized capital structure ... that reestablishes their investment-grade ratings."
Meanwhile, WorldCom's current stockholders will recover little, if any, value for their investment.
Shares of WorldCom closed Friday at 9 cents on Nasdaq. The company's stock, which rocketed to US$64 in 1999, had made it one of the darlings of the Wall Street bull market. The drop epitomized the bombed-out telecom industry that collapsed in a glut of capacity, excess debt and accounting scandals.
The US$2 billion funding pact, as well as savings from interest payments on debt, will cover WorldCom's funding requirements over the next year, Sidgmore said.
"We think ... we'll emerge from bankruptcy without any other additional requirements," Sidgmore said. "I think it's fair to say that we will use some of the DIP financing early on, but we will leave the lion's share of it untapped."
The bankruptcy status, which shields it from its creditors and debts, will free up about US$2 billion a year in interest payments WorldCom normally must pay on its massive debt load, Sidgmore said.
"That's really the overhang on WorldCom for the past year and half, or two years. With the mountain of debt we had ... (it) requires a couple of billion a year in interest payments. And that kind of gets in your way," Sidgmore said.
Citigroup Inc., J.P. Morgan Chase & Co. and General Electric Co.'s GE Capital financing arm agreed to arrange the funding, which will be backed by the company's assets. WorldCom expects to get US$750 million immediately.
WorldCom's bankruptcy filing listed J.P. Morgan Trust Co. National Association as the largest unsecured creditor, with bond debt of US$17.2 billion. It said Mellon Bank N.A. holds US$6.6 billion of WorldCom debt, while Citibank N.A. owns US$3.29 billion.
WorldCom said it has not lost any of its major customers and it did not expect the bankruptcy to hurt service.
"With the DIP financing, we're much more stable financially than we would have been under another scenario. I see no chance of service disruptions or network outages or all these things that people have been concerned about," Sidgmore said.
Since WorldCom's problems escalated, rivals such as Sprint Corp. and AT&T Corp. said they had seen a spike in inquiries from customers looking to switch carriers. J.P. Morgan analyst Marc Crossman recently estimated WorldCom could lose as much as US$700 million in quarterly revenues if corporate and government clients defect to rival carriers.
"The WorldCom brand is going to take a big hit too. If they do emerge, they will have a big job reinvigorating the brand since customers don't associate it with good things anymore," said independent telecommunications analyst.
(China Daily July 22, 2002)
