WorldCom Will File for Bankruptcy, Wiping Out Common Holders
By Shawn Young, Carrick Mollenkamp and Henny Sender
Staff Reporters of The Wall Street Journal
WorldCom Inc., the phone and data titan with $35 billion in annual revenue that shareholders once viewed almost as a cash machine, is virtually out of money and will file for bankruptcy protection Sunday.
The board of directors made the final decision Sunday afternoon.
The Clinton, Miss.-based company was expected to file for Chapter 11 bankruptcy protection in the U.S. District Court for the Southern District of New York , crushed by debt of about $33 billion and an accounting scandal that destroyed its access to capital.
WorldCom intends to continue serving its 20 million consumer long-distance customers and thousands of corporate clients as creditors that include bondholders and banks jockey for payment in a bankruptcy court process that will almost certainly wipe out common shareholders.
The planned bankruptcy filing, by far the largest in U.S. history, caps a spiraling series of troubles culminated in disgrace last month when WorldCom admitted to what could turn out to be the biggest accounting fraud ever. WorldCom misstated $3.9 billion in expenses over five quarters in a way that allowed it to report profits when it actually lost about $1.2 billion.
WorldCom, whose high-profile former Chief Executive Bernard Ebbers once boasted that his company's stock was more valuable than cash, had a market capitalization of about $120 billion at its peak in the summer of 1999. By Friday, with news of its impending bankruptcy filing widespread, WorldCom's market capitalization had dwindled to $280 million, less than Mr. Ebber's $408 million outstanding loan from the company. It is now at the front of a growing line of scandal-tinged flameouts among major companies that have undermined investors' faith in the market and sent stocks reeling.
WorldCom intends to restructure its $32.8 billion in debt, sell off noncore assets and focus on key businesses so it can emerge from bankruptcy protection as a viable company.
"The shame of it all is that underlying the debt and the restatement and the alleged fraud is a really great company that will ultimately survive," said Chief Executive John Sidgmore in an interview on Sunday. "If we can emerge from bankruptcy without the debt load, we can have a strong position in the industry. We might emerge with the strongest balance sheet."
The company's Chapter 11 petition, which is expected to be about 1,000 pages long, will include a list of its top 20 creditors that will be subject to revision.
It remains unclear whether Mr. Sidgmore, who took over after Mr. Ebbers was ousted in late April, will remain in charge. From here on, the company's fate is largely a matter of negotiation among WorldCom's creditors, primarily bondholders.
There is broad agreement on the need to replace Mr. Sidgmore, said people familiar with the creditors' views. Such changes are common in bankruptcies, where new leaders are often recruited, particularly if the existing management is tainted in any way. Mr. Sidgmore has denied any knowledge of the accounting improprieties, but some bondholders believe he lacks the heavyweight management credentials the company needs and was too close to Mr. Ebbers and fired Chief Financial Officer Scott Sullivan.
Mr. Sidgmore said he doesn't believe his departure would benefit the company. "If you believe the company is going to be liquidated, then that's what you need," he said of a restructuring guru. "If you believe that the company is going to be rebuilt, then I think they're dead wrong."
"The most important thing is to ensure stability," says Danny Golden, the Akin Gump Strauss Hauer & Feld LLP lawyer for the bondholders making up the informal creditors committee. "To preserve WorldCom's network of customers and suppliers, speed is key."
One of WorldCom's first expected moves once it has filed for bankruptcy protection will be to ask the judge to approve a $2 billion loan from its banks in the form of senior secured debtor-in-possession financing. While that is being considered, WorldCom will have access to interim funding of $500 million to $1 billion, according to people familiar with the situation. It will be up to WorldCom to decide how much it needs. When Enron Corp. filed for bankruptcy, the company had $1.5 billion at its disposal, but the troubled energy firm said it needed only $250 million.
The debtor-in-possession plan could be WorldCom's first step toward emerging from bankruptcy successfully and quickly. The funding was arranged by lead bank Citigroup Inc. along with J.P. Morgan, Chase & Co . and General Electric Co .'s financial-services arm, GE Capital.
Providing the financing gives these banks what is called "super-priority" status among WorldCom's creditors, which means they will be paid before anyone else. In return for the loan, WorldCom is expected to provide collateral, including account-receivables in the form of paid bills from U.S. customers.
Another early step will be for the court to designate WorldCom's so-called critical trade vendors. Those are companies, such as the regional Bells, that are so critical to WorldCom's operations that they will be paid before other WorldCom creditors. WorldCom owes BellSouth Corp, SBC Communications Inc., and Verizon Communications Inc. roughly $200 million each and owes Qwest Communications International Inc. closer to $85 million, said people familiar with the matter. Without the ability to rent phone lines from the Bells and connect to their local phone networks, WorldCom wouldn't be able to function.
The Bells, who see themselves as competitors of WorldCom in the long distance business, have demanded upfront payments by the Bells, along with other suppliers and have hugely accelerated the rate at which the company burned through its remaining cash. The payment demands helped speed a bankruptcy filing that most already viewed as inevitable. Even with WorldCom in bankruptcy, the regional Bells seem inclined to take a tough stance.
"We will take an aggressive approach to protecting the interests of our shareholders," said Peter Thonis, a spokesman for Verizon, the largest of the Bells.
Some people familiar with the situation say that WorldCom's cash flow will improve significantly because of the protection a Chapter 11 filing provides and that the company may not need the bulk of the $2 billion debtor-in-financing money. For example, WorldCom won't have to pay $500 million in estimated quarterly interest expenses that go to WorldCom's bondholders. The savings could add up fast, possibly resulting in an estimated $2 billion in interest payments saved next year, according to a Banc of America Securities analysis.
"Working capital could actually shift to be a significant" help to WorldCom's operations, Trent Spiridellis, a Banc of America high-yield analyst, said.
In its quest to regain as much stability as possible, WorldCom could fork over generous retention bonuses to key employees, even as the bankruptcy filing deprives thousands of recently laid-off workers of their full severance payments. Big bonuses to prevent distracting and expensive turnover are common, though they have generated increasing controversy.
WorldCom's longer term tasks will be more difficult. It has to protect the rapidly eroding value of its brand. And it has to decide what its core business should be. WorldCom does not have a group of assets it can easily spin off to raise billions of dollars. Some minor assets, such as the company's Brazilian ( news - web sites) and Mexican operations, could be easily disentangled from the rest of the company, but would not raise much money.
Some of the stakeholders in the bankruptcy say once WorldCom's balance sheet is clean, it could become an attractive acquisition target for the Bells or other competitors. But so far would-be buyers remain intensely wary of the company's weakening core business and the liabilities that could be generated by the ongoing investigations of the company's accounting.
