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WorldCom Cashes Out

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By Jeff Hwang (TMF CamX)
July 22, 2002

WorldCom (Nasdaq: WCOME) finally surrendered to its massive $41 billion debt load yesterday, filing the largest bankruptcy in U.S. corporate history. The nation's second-largest long-distance provider has $107 billion in listed assets -- almost twice the listed asset value of Enron's $63.4 billion filing late last year.

WorldCom CEO John Sidgmore, who replaced Bernie Ebbers in April, said that Chapter 11 protection from creditors is now necessary, as the company has run out of cash. Following one of the largest cases of accounting fraud to date, WorldCom lost the vital access to capital it needed to stave off starved telecom vendors seeking payments. The bankruptcy filing saves WorldCom from approximately $500 million in quarterly interest expenses to its bondholders.

To continue operations through bankruptcy, WorldCom obtained $750 million in senior debtor-in-possession financing from Citigroup (NYSE: C), General Electric (NYSE: GE) subsidiary GE Capital, and J.P. Morgan Chase (NYSE: JPM). That loan could increase to $2 billion in new financing. The financing gives the lenders "super-priority" status among WorldCom's creditors, meaning they will get repaid for their new loans before anyone else.

The restructuring process is expected to take nine to 12 months -- relatively quick for a company the size and complexity of WorldCom. However, the timing of the company's re-emergence from Chapter 11 is contingent on its auditor, KPMG.

Last month, WorldCom confessed that it hid $3.8 billion worth of expenses over the five previous quarters -- expenses that turned the previously reported profits into $1.2 billion in losses over that same period. What's worse is that the restatements aren't complete. KPMG must sanitize several years of WorldCom's financial statements before WorldCom can re-emerge -- but nobody knows exactly the extent to which the accounting problems persist. Sidgmore hopes the company can scream "Brand new!" by early 2003.

To raise cash, the company will sell many of its non-core assets. However, Sidgmore announced that WorldCom will maintain its core assets -- namely its UUNet Internet unit and its MCI (Nasdaq: MCIT) long-distance business, saying, "Reorganization isn't going to be a liquidation." No new layoffs have been announced in addition to the 17,000 jobs, or 20% of its workforce, it cut last month.

Though bankruptcy will most likely wipe out the value of its equity shares, WorldCom traded 50% higher at $0.14 per share late this afternoon. But don't trick yourself into thinking that WorldCom is a bargain -- what once sold for $66 is most likely not worth anything at all, as the company is almost entirely in the hands of its creditors.

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