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WorldCom Files for Record Bankruptcy

Business: Massive debt and an accounting scandal bring down the telecom giant. It ranks as the nation's biggest corporate failure ever.

July 22, 2002|JAMES S. GRANELLI and ELIZABETH DOUGLASS | TIMES STAFF WRITERS

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.

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