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WorldCom may file for bankruptcy on Monday

Jessica Hall in Philadelphia

WorldCom Inc, the long-distance telephone and data services company buckling under a $3.85 billion accounting scandal and a mountain of "junk-rated" debt, may file for bankruptcy protection as early as Monday, sources familiar with the situation said on Thursday.

A bankruptcy filing by WorldCom, which has $104 billion in assets and transmits half the world's Internet traffic, would eclipse the Chapter 11 filing by collapsed energy trader Enron Corp as the nation's largest insolvency.

A WorldCom spokesman declined to comment. Chief executive John Sidgmore said on July 9 a decision on whether to pursue bankruptcy protection, or some other financial reorganisation, would be made within three weeks. The filing is expected on Monday or early next week, the sources said.

Shares of WorldCom lost 1 cent to close at 9 cents on the Nasdaq market on Thursday. WorldCom's once high-flying stock, which rocketed to $64 in 1999, made it one of the darlings of the Wall Street bull market. Its swift drop epitomised the bombed-out telecom industry that crumbled under a glut of capacity, excess debt and accounting scandals.

FUNDING WILL KEEP BUSINESS OPERATING

The Clinton, Mississippi-based company, which has 85,000 employees and operations in 65 countries, has lined up about $2 billion in funding that would allow it to keep operating under a bankruptcy reorganization, sources familiar with the situation told Reuters this week.

Citigroup Inc, J P Morgan Chase & Co and General Electric Co's GE Capital financing arm will provide the so-called debtor-in-possession funding, which will be backed by the value of WorldCom's high-speed Internet network and other assets, those sources said.

The company also has been in talks to secure $3 billion in funding to avoid or delay bankruptcy, but those discussions were put on the back burner as it arranged the debtor-in-possession funding, sources said.

WorldCom last month disclosed it hid $1.2 billion in losses by failing to report $3.85 billion in expenses and was charged with fraud by the US Securities and Exchange Commission.

The company, which has $30 billion in debt, fired its chief financial officer, Scott Sullivan, who it alleged orchestrated the accounting debacle. Its former chief executive, Bernie Ebbers, resigned under pressure in April.

Its bankruptcy would follow filings by rivals such as Global Crossing Ltd., Flag Telecom, KPNQwest and Adelphia Business Solutions Inc.

Federal Communications Commission chairman Michael Powell said this week he did not believe service would be disrupted at WorldCom, the No 2 US long-distance provider with more than 20 million customers.

ASSETS SALES FROZEN

The company said on Wednesday it would freeze certain assets for 80 days in exchange for a temporary halt to legal efforts by a group of banks trying to recover a $2.5 billion loan made to the company.

A district court judge in New York said he would approve the deal if all 25 banks involved in suing WorldCom signed it.

WorldCom missed $79 million in interest payments due on Monday, which prompted debt-rating agencies Fitch Ratings and Standard & Poor's to cut their debt ratings. Meanwhile, several state pension funds filed lawsuits alleging WorldCom provided misleading information during a 2001 bond offering.

NEAR-TERM BENEFIT FOR RIVALS

Since WorldCom's problems escalated, rivals such as Sprint Corp and AT&T Corp said they've seen a spike in inquiries from customers looking to switch carriers.

"Assuming AT&T, given is scale and scope, captures 70 per cent of the incremental business, AT&T could pick up $500 million of revenue. Sprint, and to a lesser extent Qwest, may also benefit from WorldCom's fallout," JP Morgan analyst Marc Crossman said.

The benefit may be short lived, however, since WorldCom could emerge from bankruptcy without debt, giving it a lower cost structure and the flexibility to slash prices. That could trigger a massive price war and even force restructuring at its largest competitors, analysts said.

"If (WorldCom) gets rid of its debt, it's going to force competitors to take charges and write-downs, and possibly consider their own restructuring. Whether or not they file for bankruptcy is unknown, but I don't see how these companies could compete head to head with WorldCom," said Kaufman Bros analyst Vik Grover.

Still, some competitors shrugged off concerns that WorldCom would be unbeatable if it emerges from Chapter 11 protection.

"For any company that goes into bankruptcy they have significant restart-up costs to reacquire customers and update facilities. That's a cost that would doubtlessly add new debt," said Peter Thonis, a spokesman for Verizon Communications.

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