WorldCom Files for Record Bankruptcy
WorldCom Inc., the nation’s second-largest long-distance company, crumpled into bankruptcy late Sunday, brought down by massive debt, a shortage of cash and an accounting scandal that rocked investor confidence.
The Clinton, Miss.-based telecommunications giant listed $104 billion in assets in its filing for reorganization under federal bankruptcy laws, making it the largest such case in history. It dwarfs December’s Chapter 11 filing by Houston energy trader Enron Corp., which listed assets of $63.4 billion.
WorldCom built itself into a telecommunications giant through some 75 acquisitions but along the way amassed $32 billion in debt.
The company’s financial troubles stretch across the U.S. economy, from about 20 million residential and corporate customers to the large and small pension funds that put nearly $30 billion into WorldCom bonds that now are almost worthless.
Telephone and data service for customers of WorldCom and its MCI subsidiary is not expected to be disrupted as the carrier tries to restructure. WorldCom also carries half the traffic on the Internet.
“I want to assure the public that we do not believe this bankruptcy filing will lead to an immediate disruption of service to consumers or threaten the operation of WorldCom’s Internet backbone facilities,” said Michael K. Powell, chairman of the Federal Communications Commission.
But the U.S. Telecom Assn., a trade group whose largest members are WorldCom creditors, warned that the company’s filing could lead to a “state of crisis” in the industry that could raise costs for other telephone companies and their customers.
In a letter Sunday to the FCC, the trade group asked the agency to make sure that the bankruptcy filing “does not undermine the financial stability of other carriers that provide services to it.”
WorldCom tops the long list of corporate scandals in the last year that have helped to rattle investor confidence and shake stock markets to their lowest points in recent years.
“The impact will be way more significant than anything that we have seen before in telecommunications,” said Roger Wery, a telecom expert at consulting firm PRTM in San Francisco. “It will start with the telecom industry, but it then has ramifications across real estate and many other industries. In terms of scale and visibility, this company can further destroy investor confidence and eventually consumer confidence.”
Much of WorldCom’s debt, consisting of $29.3 billion in bonds and $2 billion in bank loans, will be erased in a proceeding that protects the company from creditors while it reorganizes. Eventually, a judge and the company’s creditors must approve a reorganization plan likely to repay creditors only cents on the dollar. Shareholders also will be wiped out.
Industry experts said that because of the decimated telecommunications industry, the company’s assets probably are worth less than $15 billion, rather than the more than $100 billion WorldCom listed in its filing.
The losses stem from the massive investments in the telecommunications industry that went to build fiber-optic networks much faster than demand was growing for high-speed connections.
The company’s bankruptcy papers, which run about 1,000 pages, were filed Sunday night in U.S. Bankruptcy Court in New York.
WorldCom said it planned to work through the bankruptcy and emerge in nine months to a year as a smaller but intact operation. It will obtain $750 million in cash today as part of $2 billion in special debtor financing as it pursues its plan to sell some noncore assets--mainly its wireless, real estate and Brazilian and Mexican operations.
“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,” John W. Sidgmore, the company’s chief executive, said in a statement.
Spokesman Brad Burns said the company would hire a restructuring chief, who would report to Sidgmore, and add former Atty. Gen. Nicholas Katzenbach and University of Georgia accounting professor Dennis R. Beresford to the board. Burns denied widespread reports that Sidgmore will be forced out, noting that creditors and vendors had not broached that subject with the company.
Many large corporate customers, which provide two-thirds of WorldCom’s revenue, are looking for other carriers. With WorldCom’s current program to lay off 20% of its work force, analysts figure that any outages and glitches that occur in its network will take longer to repair.
WorldCom’s demise had been expected after the company that exploded onto the telecom scene in the last decade announced June 25 that it had uncovered internal accounting irregularities. Over 15 months, through March, the company overstated revenue by nearly $3.9 billion by converting expenses into capital expenditures--an accounting sleight of hand that gave the company profits when it should have recorded losses.
The scandal brought condemnation from President Bush and helped spur Congress to develop stricter accounting rules and civil and criminal penalties. It also opened the company up to a slew of new fraud claims, including a lawsuit by the Securities and Exchange Commission.
The company’s aggressive accounting, high executive salaries and $408 million in personal loans to founder and former CEO Bernard J. Ebbers rival the improprieties attributed to Enron.
Three years ago, WorldCom’s soaring stock valued the company at $120 billion. By Friday, with its share price closing at 9 cents, the company was worth only $281 million.
“Chief executives are clearly going to be held much more accountable, whether they’re held criminally accountable by the government or civilly accountable by stockholder suits,” said Tom Evslin, chairman of ITXC Corp., a Princeton, N.J., long-distance carrier. “The result is still that there’s going to be a lot of pressure to tell the whole [quarterly financial] story in an unadorned way.”
Sidgmore had insisted July 2 that WorldCom was too big to fail and remains a “key component of our nation’s economy and communications infrastructure.”
A week later, though, company executives acknowledged that it was getting harder to avoid a bankruptcy filing as anxious vendors, mainly the Baby Bells that provide WorldCom access to their local customers, began wiping out WorldCom’s once-substantial cash position by demanding payment upfront for service.
WorldCom has gone through $4 billion in cash and loans since the end of March and was left with what it said was several hundred million dollars by the time it filed for bankruptcy protection.
Last week, the company won commitments for $2 billion in loans to operate under the auspices of the Bankruptcy Court. The special financing, arranged with J.P. Morgan Chase & Co., Citigroup Inc. and GE Capital, the financial services unit of General Electric Co., kicks in with WorldCom’s bankruptcy filing.
WorldCom might not need to touch much of that money because the bankruptcy filing allows it to halt interest payments and other debt repayments, saving it hundreds of millions of dollars.
Nevertheless, industry analysts and experts already have been assessing WorldCom’s viability in Chapter 11, and they are not sure they like what they see. The company is trying to sell operations in Mexico and Brazil, but those units are not expected to bring in much money.
Its businesses are so tied together that it would have to tear off big chunks, such as its UUNet Internet provider, its customer base or its MCI brand, to get some of the billions it needs--and those sales probably would destroy any overall value of the company.
WorldCom started out as small long-distance carrier in 1983 after the court-ordered breakup of AT&T; Corp. opened up long-distance competition and turned Ma Bell’s local service over to regional Bell operating companies, generally known as Baby Bells.
The brash Ebbers, a Canadian who attended Mississippi College in Clinton on a basketball scholarship, took over as chief executive in 1985 and put the company, then called Long-Distance Discount Service, on an acquisition spree that eventually soaked up about 75 companies. It went public in 1989 and by 1992 was the fourth-largest long-distance provider in the country. Its name was changed to WorldCom in 1995.
But it was the 1998 acquisition of MCI Communications Corp. for a record $40 billion in cash and stock that brought WorldCom widespread attention and made it the nation’s No. 2 long-distance carrier. Before then, WorldCom was known primarily in corporate circles, where it provides voice and data services to large companies.
Along the way, the company picked up a young accountant named Scott D. Sullivan, who eventually became chief financial officer and Ebbers’ right-hand man.
As WorldCom’s financial woes mounted early this year and his loans became known, Ebbers quit.
WorldCom fired Sullivan in June, blaming him for the accounting scandal, which had previously escaped both internal auditors and the company’s accounting firm, Arthur Andersen.
Times staff writer Jube Shiver in Washington contributed to this report.
