WorldCom says will emerge intact
Bankruptcy status marks largest U.S. meltdown
By Jeffry Bartash, CBS.MarketWatch.com
Last Update: 11:04 AM ET July 22, 2002
CLINTON, Miss. (CBS.MW) - Financially beleaguered WorldCom, whose bankruptcy filing is the largest ever, aims to re-emerge largely intact by early next year, the chief executive said Monday.
In a Monday press conference, CEO John Sidgmore said he hopes the company can re-emerge from bankruptcy by the first quarter of 2003. Still, he noted that "it's not clear how long the reorganization will last." See the filing.
To operate during bankruptcy, WorldCom has secured a commitment of $750 million of "debtor-in-possession" financing from Citibank, J.P. Morgan Chase and General Electric Capital. That amount could rise to $2 billion. Watch Sidgmore.
The credit will be used to supplement the company's cash flow and is subject to approval by the bankruptcy court.
WorldCom's non-U.S. subsidiaries are not included in the filing and will also continue to operate normally, Sidgmore said.
In its filing, WorldCom claimed $107 billion in assets against $41 billion in debt. On that basis, WorldCom's bankruptcy surpasses last year's $63.4 billion Enron failure.
Sidgmore said WorldCom will jettison noncore assets, repeating his aim to sell the wireless resale business and perhaps the company's stakes in Latin American affiliates.
He insisted that the company will keep its UUNet Internet unit, MCI long-distance business and overseas data operations.
"All of those things are clearly going to be a part of our future," he said, though he conceded that "creditors may think differently."
Service to customers is expected to continue uninterrupted. "We don't think our competition should relax during this period," Sidgmore said.
For now, the company is not planning more layoffs, Sidgmore said. Last month, WorldCom launched a 20 percent reduction in its workforce, with 17,000 employees losing their jobs.
Squeeze came fast
In the past week, Sidgmore indicated time was running out and that bankruptcy appeared unavoidable.
Since WorldCom confessed last month to hiding $3.85 billion in expenses, its cash reserves evaporated quickly. Bank lenders nullified one backup loan and sued for the return of another $2.65 billion credit line.
At the same time, WorldCom quickly burned up $2 billion in cash to pay some large bills, fund European operations and meet demands from nervous vendors for upfront payments, Sidgmore said.
In its last day of trading, stock of WorldCom (WCOME: news, chart, profile) slipped 3 cents to 6 cents in Friday action.
Most analysts had been expecting WorldCom to end up in bankruptcy court, which could render those shares worthless. Several years ago, the stock traded as high as $64.
Bank lenders and bondholders stand near the head of the line and will collect at least a small portion of their investments. The creditors will have a major say over WorldCom's fate and may even push to bring in an outside restructuring expert, a common occurrence in large bankruptcies. See the WorldCom bankruptcy primer.
Still, analysts say it's highly unlikely the company would be forced to shut down its network, which caters to 20 million American consumers and carries as much as half of all the world's Internet traffic.
As a last resort, the Federal Communications Commission could prevent a looming shutdown until customers find more suitable arrangements.
The agency "will act vigilantly ... to protect the integrity of the telecommunications network and protect consumers against any abrupt termination of service," FCC Chairman Michael Powell said in a statement.
Bell-ringing
Somewhat controversially, Powell suggested last week that the government might have to allow a Baby Bell to acquire WorldCom if that's the best way to preserve its network.
A deal involving a local phone giant and the nation's second largest long-distance carrier is sure to generate opposition in Washington, where lawmakers are worried about a fresh round of consolidation in the phone industry. Just six years ago, Congress passed a landmark law aimed at promoting industry competition. See Telecom Report.
For awhile, the law seemed to work. Dozens of new companies raised billions of dollars to build new networks, triggering a competitive frenzy that drove prices to all-time lows.
Yet many carriers took on too much debt and, like WorldCom, flamed out as the economic boom fizzled and customers cut back on spending.
It was under those circumstances that Chief Financial Officer Scott Sullivan orchestrated a quiet effort within the company to treat $3.85 billion in ordinary expenses as long-term capital investments. He was fired last month after the ruse was discovered.
WorldCom is restating financial results to erase reported profits over the past five quarters. Investigators hint that the restatement could increase as more accounting irregularities come to light.
WorldCom's second-quarter results, slated to be issued this week, probably won't be filed, Sidgmore said.
New board members
Meanwhile, WorldCom nominated two new independent board members to help restore credibility, Nicholas Katzenbach and Dennis R. Beresford.
Katzenbach is a former U.S. attorney general who served under President Lyndon B. Johnson. He was also the longtime general counsel at IBM. Beresford is a professor of accounting at the University of Georgia who once headed the Financial Accounting Standards Board.
The pair will lead a special investigative panel to review the company's accounting practices and prepare revised financial statements.
Jeffry Bartash is a reporter for CBS.MarketWatch.com in Washington
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