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WorldCom Bondholders Propose Debt-Equity Swap

July 06, 2002|DENA AUBIN | REUTERS

WorldCom Inc.'s bondholders are proposing a debt-for-equity swap that could throw a lifeline to the struggling telecommunications company by wiping out much of its $32.8 billion in debt.

Bondholders have been in talks with the company about a swap that probably would be part of a prearranged, or "prepackaged," bankruptcy filing, experts said Friday.

"It seems to be the logical solution for the company," said Wilbur Ross, a distressed-debt investor who has been buying WorldCom bonds for his firm, WL Ross & Co. "Everybody is pretty much in accord that that's what's needed."

Charged with fraud by the Securities and Exchange Commission, the long-distance company has hired Blackstone Group, a top restructuring advisor, and Weil Gotshal & Manges, a leading bankruptcy law firm, to help work through its myriad problems.

WorldCom edged closer to bankruptcy Monday after it was declared in default on $4.25 billion of loans, giving lenders the right to demand immediate repayment. The Clinton, Miss.-based company also said it was reexamining two more years of accounting records.

Under a debt-for-equity swap, WorldCom could get out from under much of its massive interest burden, putting it on a stronger footing against its debt-laden rivals.

"This would be the only debt-free telecom company, especially of its size," said Matthew Breckenridge, vice president of research at DebtTraders, a global high-yield specialist firm. "It would throw off a lot of cash and would be a good takeover target."

Bondholders have an interest in keeping the company alive because that gives them a better chance of recovering their money than a liquidation, experts said. WorldCom saw its bonds plummet from as high as 74 cents on the dollar to just 15 cents two weeks ago when it said it had improperly booked almost $4 billion in expenses.

"The big worry out there is that if things have to be done on [an] asset sale basis, it's absolutely the worst time to be selling telecom assets," said Nicholas Walsh, who manages $15 million of distressed debt for Wilfrid Aubrey.

A prepackaged bankruptcy also could stave off a long court proceeding, helping WorldCom more quickly regain the confidence of its customers, investors said.

"There are two risks," Breckenridge said. "One is that there are more accounting problems, and the other is that customers actually leave the company. If you can avoid both, you're in good shape."

Another concern of bondholders is that WorldCom, in an effort to avoid bankruptcy, would agree to pledge collateral to its banks in exchange for financing. That would put banks ahead of bondholders in claims on the company. They both rank equally now as unsecured creditors.

IDT Corp. has offered to acquire the long-distance and local telephone units of WorldCom in a deal it valued at $5 billion. IDT Chairman Howard J. Jonas said Friday that WorldCom executives aren't responding to the offer, but he predicted that there won't be any other bidders.

Jonas said IDT would continue to press the offer through meetings starting next week with potential partners in the deal, WorldCom's bondholders and bankers, and federal regulators.

Shares of WorldCom gained 3 cents to close at 25 cents on the Nasdaq Stock Market, which has begun proceedings to delist the stock. WorldCom has requested a hearing; the stock will continue to trade in the interim.

WorldCom's shareholders probably would end up with nothing in a bankruptcy filing because WorldCom's outstanding debt is greater than the company's value, experts said. Creditors must be paid in full before shareholders receive anything in a bankruptcy.

With more than 2.96 billion outstanding shares, a 25-cent share price means that the market is valuing the company at more than $700 million, Ross said.

WorldCom said Friday that it would continue its in-house probe of accounting problems, despite a Department of Justice request that the ailing telecom desist. The primary motivation is getting to the bottom of the company's finances, and there is no race to be first, said a source, who spoke on condition of anonymity.

The Wall Street Journal reported that the Justice Department had asked WorldCom to curtail its internal inquiry, citing concern about witness tampering, while the government investigates. A company spokeswoman declined to comment.

On Friday, WorldCom filed a federal lawsuit in Mississippi against former Chief Financial Officer Scott D. Sullivan, who was fired after the accounting scandal came to light. WorldCom is demanding that Sullivan, 40, pay back the $10-million bonus he received last year. A WorldCom attorney declined to comment; Sullivan could not be reached.

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Associated Press was used in compiling this report.

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