WorldCom Inc. filed the largest bankruptcy in U.S. history, pledging to salvage a company
hobbled by accusations of fraud and dwindling cash.
The company sought Chapter 11 protection from creditors in
U.S. Bankruptcy Court in Manhattan, listing $107 billion of assets
and $41 billion of debt, including $24 billion in bonds. The
decision was anticipated for weeks after WorldCom said it hid
$3.85 billion in costs over five quarters to create profits.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
WorldCom, which handled more than half the world’s Internet
traffic and employed 85,000 people as its market value rose to
more than $100 billion, was founded in 1983 in a Mississippi
diner. It grew through more than 75 acquisitions to become the
second-biggest U.S. long-distance telephone company.
“WorldCom is better off in bankruptcy,” said Gary Hindes of
Deltec Asset Management Corp. “They’re burning through cash like
crazy.” Bankruptcy lets them “come out with a clean slate.”
WorldCom’s filing adds to what already was a record pace for
U.S. corporate bankruptcies this year. Before WorldCom, 131 public
companies with about $150 billion in assets, including fiber-optic
network operator Global Crossing Ltd., had filed for bankruptcy
protection, according to BankruptcyData.Com.
Last year, 255 publicly traded companies put $260 billion of
assets under court protection, almost triple the record that had
stood for a decade. That figure includes Enron Corp.’s then-record
$63.4 billion bankruptcy in December.
Plummeting Fortunes
WorldCom arranged a $2 billion bankruptcy credit line to help
fund operations during its reorganization. J.P. Morgan Chase &
Co., Citigroup Inc. and General Electric Co.’s GE Capital unit
agreed to provide the loan, secured by company assets. The company
will ask a judge for $750 million pending approval of the full
amount, WorldCom spokesman Brad Burns said.
The Clinton, Mississippi-based company’s fortunes have
plummeted since 1999, when it was gobbling up rivals and
challenging the long-distance dominance of AT&T Corp. Declining
sales and growing debt squeezed the industry and wiped out more
than $100 billion in the company’s market value.
The company, with more than 20 million customers, said the
bankruptcy reorganization has a positive side.
“Chapter 11 enables us to create the greatest possible value
for our creditors, preserve jobs for our employees, continue to
deliver top-quality service to our customers and maintain our role
in America’s national security,” Chief Executive Officer John
Sidgmore said in a statement.
Unanimous Decision
WorldCom’s board agreed to seek Chapter 11 protection at a
meeting Sunday afternoon. The filing doesn’t cover WorldCom’s
international operations, Burns said.
“They look like a going concern even after you adjust for
the $3.85 billion,” said Edward Altman, a professor at New York
University’s Stern School of Business.
WorldCom’s shares have plunged more than 90 percent since
June 25 when the company disclosed the accounting irregularities.
They traded as high as $62 in 1999 and sold for 9 cents on Friday,
and the bankruptcy is likely to make them worthless. WorldCom
bonds trade at pennies on the dollar.
Co-founded by Bernard Ebbers, WorldCom borrowed in excess of
$30 billion to fund its acquisitions at the height of the 1990s
technology boom.
Biggest Purchase
The biggest purchase netted long-distance unit MCI
Communications Corp. for $47 billion in 1998. WorldCom’s sales
peaked at $35.9 billion in 1999 and fell to $35.2 billion in 2001.
U.S. Federal Communications Commission Chairman Michael
Powell said in a statement he didn’t think service would be
disrupted for WorldCom’s customers.
By law, a telecommunications carrier must notify the FCC and
file for regulatory permission to begin shutting down service to
voice or data customers. Federal law then prohibits the company
from ending service for at least 31 days, a period Powell said he
would extend if necessary to protect consumers.
WorldCom and Global Crossing are among the victims of the
collapse in telecommunications companies. Dozens in the industry
filed for bankruptcy in the past two years, including At Home
Corp., Winstar Communications Inc. and PSINet Inc.
Banks cut off credit to WorldCom after the Securities and
Exchange Commission filed fraud charges and the company’s
financial restatement triggered a $2.65 billion loan default.
The company also is under investigation by the U.S. Justice
Department and at least two congressional committees. WorldCom is
conducting an internal accounting probe back to 1999 that
lawmakers say may reveal another $1 billion in misreported costs.
Ebbers’ Resignation
Ebbers resigned as CEO in April, owing WorldCom more than
$408 million for loans. Sidgmore, vice chairman of WorldCom since
1996, took over and WorldCom replaced auditor Arthur Andersen LLP.
Chief Financial Officer Scott Sullivan was fired in June.
The company is firing 17,000 workers and has said it will
sell wireless assets and operations in Latin America and Japan to
raise cash. It missed a $79 million payment Monday and has said it
would save $71 million by not paying a scheduled stock dividend.
WorldCom may shed some debt by swapping bonds for equity
because the company will have difficulty raising cash from asset
sales, investors say.
“There’s a lot of value here, and bondholders are going to
want it, so it’s going to be contentious,” said Eric Tutterow, an
analyst at KDP Investment Advisors. Bondholders may get 20 cents
on the dollar in stock of a reorganized company, he said.
J.P. Morgan Trust Co., representing bondholders owed $17.2
billion, is listed in the federal court filing as WorldCom’s
largest creditor. Other top creditors are Mellon Bank NA, trustee
for bondholders owed $6.6 billion, and Citibank NA, trustee for
bondholders owed $3.29 billion.
New Board Members
J.P. Morgan Chase, owed more than $3 billion, is the largest
single bondholder listed in the filing. Deutsche Bank AG is owed
more than $240.7 million for a bank loan, court papers show.
At Sunday’s meeting, WorldCom’s board approved two board
members to succeed Ebbers and Sullivan. The company plans to name
Nicholas Katzenbach, a former U.S. attorney general, and Dennis
Beresford, a professor of accounting at the University of Georgia
who formerly served as the chairman of the Financial Accounting
Standards Board.
