WorldCom files for Chapter 11, keeps operating

WorldCom will conduct business as usual while it develops a reorganization plan under Chapter 11 of the U.S. Bankruptcy Code, the company said in a statement Monday morning.

The company Sunday evening filed for court protection in the U.S. Bankruptcy Court for the Southern District of New York. That filing covers WorldCom and substantially all of its active U.S. subsidiaries, but not its non-U.S.subsidiaries, according to the statement.

WorldCom's is the largest bankruptcy filing in U.S. corporate history, The Wall Street Journal said in its online edition Sunday night, with the company listing assets of over $100 billion, and having more than 1,000 creditors.

The company has debt estimated at $32.8 billion, several thousand corporate customers, serves around 20 million consumers and runs the world's biggest Internet network. Subsidiaries include Internet infrastructure company UUNet Technologies Inc. and telecommunications carrier MCI Communications Corp.

"Our debt had become the enemy of our company, threatening our viability and driving down our stock price. We regret we are in this position, but the significant accounting irregularities we discovered reduced our refinancing options. This is the only way to provide for the future, and help the greatest number of people, including our customers, employees, and share holders," said John Sidgmore, president and chief executive officer of WorldCom at a New York press conference Monday morning.

Chapter 11 provides a financially beleaguered company a method to keep operating its business under protection from its creditors while developing a plan for resolving its financial problems.

Creditor groups and company management will now negotiate what they think a reorganized company will be worth, and issue stock to senior bondholders as compensation, said Edie Hotchkiss, associate professor of finance at Boston College. It's likely that smaller bondholders will see nothing, depending on how the negotiations play out, she said.

Also, WorldCom's current creditors might not be its creditors once a bankruptcy plan is completed, said Hotchkiss. Buyout firms and other investors often snap up the debts in cases like these, because the creditors just want to make sure they get something from their investment, she said.

"WorldCom plays a vital role in America's national security infrastructure, and this (filing) will allow us to serve (our customers) in a normal manner, and operate our business in a normal course," said Sidgmore.

U.S. Federal Communications Commission Chairman (FCC) Michael Powell released a statement that said he is "deeply concerned" about the bankruptcy filing, but that it would not lead to an interruption of service to Internet customers of WorldCom. Powell said the FCC will act "vigilantly" to protect the telecommunications network, and it reserves the right to involve itself in the bankruptcy proceedings "as necessary."

WorldCom's network is not expected to go dark, but enterprise customers are worried about the services they can expect from a company in turmoil, said Courtney Quinn, senior analyst at Yankee Group in Boston. Sidgmore said during Monday's press conference that no further layoffs are planned at this time, but if that changes, customers should be concerned, she said.

If service levels deteriorate, it could represent a way for customers to get out of their contracts, said Quinn. Most contracts for telecommunications services run around two to three years, with terms and conditions specifying a certain level of service. If customers feel they are not receiving service at the level specified in their contract, they could attempt to free themselves from the contract, and renegotiate with another provider, she said.

WorldCom has obtained an agreement to arrange up to $2 billion in Debtor-in-Possession (DIP) financing, of which $750 million has already been committed by several banks, including General Electric Capital. This facility, once approved by the Bankruptcy Court, will allow the company to operate its business normally while it focuses on its new strategic plan, restructures its finances, reduces its debt burden and strengthens its balance sheet, according to the statement.

The $750 million in financing, if approved, "will carry us throughout the rest of the year," said Sidgmore. WorldCom was making payments of $2 billion a year in interest on its debt, which it expects to cut by three-fourths through the Chapter 11 process, he said.

"This is not the path we wanted to take, but it is clearly the right thing to do," Sidgmore said.

The filing saves WorldCom from having to make those interest payments, freeing up enough cash to keep their operations running with help from the DIP financing. It's not unusual for a filing of this size to require that large a DIP amount, which is considered a good credit risk by lenders, said Hotchkiss.

"This is not the path we wanted to take, but it is clearly the right thing to do," Sidgmore said.

WorldCom will certainly look to sell some of its noncore assets, although determining exactly what are its core assets is a strategic decision as much as a financial one, said Quinn.

The company was built by a series of acquisitions by former CEO Bernard Ebbers, who resigned in April. Part of the company's problems have been linked to the difficulty in integrating those acquisitions, which could affect the divestiture process, Quinn said.

"If you pick the smallest piece out of (the acquisitions), will there be a problem mixing and matching assets? What part of the picture can you remove, and still have it look like a whole picture? WorldCom will be a very different company in a year," Quinn said.

The company is expected to sell its Latin American interests, and its wireless resale business, keeping the Skytel paging system, she said.

Expenses will certainly be reduced by the decision to suspend executive bonuses, which leaves Sidgmore's compensation at "just a salary," he said. Executive compensation for the rest of the year will be determined by judges, he said.

WorldCom also announced the appointment of two new members to its board of directors. Nicholas Katzenbach and Dennis Beresford will have an oversight role over the previously announced internal investigation into the accounting irregularities. Katzenbach was U.S. Attorney General during the Lyndon Johnson administration in 1965 to 1966, and later served as senior vice president of IBM Corp. Beresford is currently a professor at the University of Georgia, and was chairman of the Financial Accounting Standards Board, which is responsible for maintaining the GAAP [generally accepted accounting principles] standard, from 1987 to 1997.

The appointment of the directors "demonstrates our seriousness in getting to the bottom of those problems," said Sidgmore.

KPMG LLP is currently auditing WorldCom's financial records, and the turnaround time for the company will depend on when KPMG can deliver those results, said Sidgmore.

WorldCom was scheduled to report its second quarter results next week, but is now unlikely to do so, said Sidgmore.

WorldCom was valued at around $120 billion at its peak in the summer of 1999. Late last week, WorldCom's market capitalization had fallen to $280 million, The Wall Street Journal reported.

While a Chapter 11 filing enables WorldCom to keep its creditors at bay, it does not wipe out the company's other difficulties, which include: