WorldCom Is on the Brink of Chapter 11

Executives at WorldCom Inc. worked late into the night Friday to put together some final pieces for a bankruptcy case that could be filed as early as Sunday, making the scandal-scarred phone company the biggest corporate failure.

At the same time, they rushed to reassure critical business customers and to attract new ones with stronger guarantees that WorldCom’s telecommunications services won’t be interrupted as the nation’s second-largest long-distance carrier reorganizes under Chapter 11 of federal bankruptcy laws.

The Clinton, Miss., company has raced through close to $4 billion in cash and loans in the last four months, sources said, mainly because vendors have been demanding full payment upfront in anticipation of a possible bankruptcy filing. WorldCom will file its petition “within five days” and possibly Sunday, a source familiar with the company said.

Service for about 20 million commercial and residential customers of WorldCom and its MCI unit is not expected to be interrupted.

“Most people who read the business pages are not going to be shocked by a bankruptcy announcement, but certainly the size of this bankruptcy would be overwhelming and unprecedented,” said analyst Patrick Comack of Guzman & Co. in Miami. “This will be the big one, the mother of all bankruptcies.”

The once-fast-growing voice and data carrier had nearly $104 billion in assets at the end of March, dwarfing Houston energy trader Enron Corp.’s roughly $50 billion for the dubious distinction of being the biggest business bust ever.

Predictions of WorldCom’s fall have been gaining since the company announced June 25 that it had uncovered accounting irregularities. A simple conversion of expenses into capital expenditures overstated revenue by nearly $3.9 billion last year and the first three months of this year, giving the company profits when it should have recorded losses.

Analysts and other industry experts already have sized up WorldCom’s business and where it might go in a bankruptcy sale of assets. One of the most valuable pieces is the UUNet business that moves a little more than half of the nation’s Internet traffic. AT&T; Corp., which handles most of the rest, and Sprint Corp. should be interested in picking up those operations, said David Willis, an analyst at META Group Inc. in Stamford, Conn.

“The entire business world is moving to [Internet] technology. UUNet really leads in that area, and it’s impossible to duplicate that network,” Willis said. Corporations are devoting, on average, 20% of their information technology budgets to telecommunications, he said.

With an eye on WorldCom’s vital defense and government contracts, the Federal Communications Commission has said that if the company were forced to pull the plug on its operations, the FCC could delay shuttering crucial businesses such as UUNet until customers find new providers.

Another key asset, especially for WorldCom’s survival, is the company’s ability to hold on to lucrative business customers, who buy a range of services and account for two-thirds of WorldCom’s revenue. Few have bolted so far, but many reportedly have signed up with other carriers for back-up service.

The vast majority are signed to contracts lasting a year or more, and the larger the contract, the longer it typically runs. The contracts include “service level agreements” that require WorldCom to cut its customers’ bills if it fails to perform as well as promised.

Earlier this week, WorldCom doubled the credits provided by the service level agreements. The point, spokeswoman Debbie Lewis said, is “to add more financial teeth” to those agreements.

The company also began offering a six-month unconditional service guarantee to any business that signs up or renews its service by Aug. 31. Customers not satisfied after six months can break their contracts without penalty, Lewis said.

And to calm anxieties further, WorldCom has been smothering its bigger customers with attention, holding weekly conference calls with senior vice presidents and sending many updates by e-mail.

“They’ve been assuring us almost on a daily basis that service levels will not change,” said Robb Deignan, spokesman for the California Department of General Services, which uses WorldCom for much of its Calnet telecommunications network.

The company isn’t going to the same lengths to reassure its MCI consumer and small-business customers. Instead, it’s counting on MCI’s loyalty programs, including frequent-flier deals, to help keep those customers on the line.

MCI has been the most aggressive of the phone companies when it comes to financial incentives. Heavy callers rack up 500 or more frequent-flier miles per month.

The company’s latest residential service, launched in April, includes unlimited local and long-distance calling for $50 to $60 per month, along with frequent-flier miles or movie-rental credits. That service has attracted more than 600,000 customers in 34 states, including California, said spokeswoman Audrey Waters.

Because consumers and small businesses regularly change long-distance companies, WorldCom has to sign up new customers at a brisk pace just to maintain its revenue stream. Waters and Lewis said the firm is continuing to vie for new customers in all its product lines.

The company has announced only one service that it is discontinuing: mobile phones. And aside from the disclosures it has made on its Web site and in news releases, WorldCom is not giving the residential or small-business customers it recruits any warnings about its financial condition, Waters said.

The well-known MCI brand is a valuable commodity, analysts say. To create the kind of nationwide recognition it has is both costly and time-consuming, they said, and something that the regional Bell operating systems such as BellSouth Corp. and SBC Pacific Bell parent SBC Communications Inc. would rather buy than build.