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More Firms on Brink?

Telecom: WorldCom's bankruptcy filing may drag down other troubled companies, industry observers say.


WorldCom Inc.'s mammoth bankruptcy filing Sunday could prolong the telecommunications industry's long and painful implosion by dragging teetering companies over the brink with it.

More than three dozen telecom firms have already landed in Bankruptcy Court since a crippling combination of overcapacity and sinking demand left the industry struggling to find a way to pay its crushing debts. Though few companies are suspected of the kind of alleged fraud that precipitated WorldCom's downfall, swirling investigations into questionable telecom accounting practices are contributing to an atmosphere of doom.

Now, with the nation's No. 2 long-distance provider seeking protection from its creditors, some observers fear that things could get worse before they get better.

"WorldCom is devastating, but that doesn't mean all the trouble is over in telecom," said Jeff Kagan, an industry consultant in Atlanta. "The next tier of players is really unstable.... I see more bankruptcies and more acquisitions of assets for pennies on the dollar."

The first tremors from WorldCom's bankruptcy will be felt by anemic equipment companies such as Lucent Technologies Inc. and Nortel Networks Ltd., which supplied hundreds of millions of dollars worth of networking gear on credit for the phone giant's huge and diverse communications network.

Now the equipment makers are near the top of WorldCom's lengthy list of creditors, owed substantial sums of money that will never be paid. They have already taken some write-downs on vendor financing they no longer expect to recoup from smaller carriers, but they have yet to make significant allowances for WorldCom. On top of that, having one of their biggest customers in bankruptcy means their prospects for making new sales are bleaker than ever.

Though they may not be in immediate danger of following WorldCom into bankruptcy, the gear makers' own chances for a long-awaited financial recovery just got much worse, analysts said.

The industry's remaining carriers, whose backbone networks transmit voice calls, faxes, e-mail messages and other data around the country, will also be hurt by WorldCom's descent.

Spooked lenders and bondholders could force debt-laden upstarts--an ever-shrinking club of companies--into bankruptcy by demanding instant repayment if they default on just one of their myriad loans.

Giant rivals such as AT&T Corp. and Sprint Corp. also could suffer if they find themselves competing against an increasingly cutthroat WorldCom that is desperate to keep customers. Already, WorldCom has eased the terms of its existing contracts to make them more flexible and generous. The situation will be exacerbated if WorldCom emerges from bankruptcy with much of its debt washed away.

Even phone companies overseas such as Deutsche Telekom of Germany and France Telecom are likely to be touched by the financial tentacles of WorldCom's historic bankruptcy filing, since it so profoundly undermines the overall health of the industry.

"It's a terrible mess, but it's probably the inevitable result of the previous excesses," said Cliff Higgerson, general partner at CommVentures, a venture capital firm focused on the telecommunications industry.

The company that bears the most striking resemblance to WorldCom these days is Qwest Communications International Inc., the fast-growing network operator that owns former Baby Bell U.S. West. The Denver company's strength in local phone service has been overshadowed by more than $21.4 billion in long-term debt and heavy losses from its lagging long-distance operations.

But in recent months, Qwest's financial troubles have been overshadowed by questions about its accounting practices. The company is under investigation by the Securities and Exchange Commission and the Department of Justice for a variety of allegations involving misleading bookkeeping.

Many analysts dismiss the notion that Qwest could fall into bankruptcy, given its standing as the local phone provider in Washington, Oregon, Utah, Arizona and 10 other states. But others are not so sure, given the rapid-fire events at WorldCom.

"I think realistically you have to look at Qwest, with two SEC investigations and the Department of Justice looking at them," said Lisa Pierce, an analyst with Giga Information Group.

The most vulnerable telecom firms, industry analysts say, are the smaller network operators that loaded up on debt to lay their fiber-optic cables and now don't have enough customers to fill their costly pipes. Several of them have already filed for bankruptcy protection, including Global Crossing Ltd., Williams Communications Group Inc. and 360Networks Inc.

They could be joined by firms such as Level 3 Communications Inc., Broadwing Inc. and the communications unit of Dynegy Inc., according to Higgerson and others.

"They are the big question mark because they just don't have the revenues," Kagan said.

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