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MCI's Lenders Back Plan to Exit Bankruptcy

Worldcom, notorious for massive corporate fraud, is trying to turn over a new leaf coming to agreement with its creditors on a revised bankruptcy reorganization plan.

The company announced a new reorganization plan with the U.S. Bankruptcy Court for the Southern District of New York. The company said it would be permanently changing its name to MCI, and relocating its corporate headquarters to Ashburn, Va.

Worldcom also announced management changes, including the naming of Robert T. Blakely as its new chief financial officer.

Former Compaq CEO Michael Capellas is MCI's chairman and CEO and he said that the company's senior noteholders have agreed to the terms of the new reorganization plan, which will include approximately $3.5 billion to $4.5 billion in debt, net of cash.

The MCI bankruptcy reorganization plan could potentially lead to the company emerging from Chapter 11 proceedings by September.

"The fall time frame is very aggressive and there is the question of whether the judge will approve the reorganization plan, and after that it all depends on execution," says Lisa Pierce, research fellow for Giga Information Group, a subsidiary of Forrester Research.

The revival of WorldCom, under the name MCI, could present a leaner rival to others in the battered telecommunications sector.

"MCI is fulfilling their legal requirements and AT&T could be facing a formidable competitor. If I was Dave Dorman, I wouldn't want Michael Capellas breathing down my neck," Pierce added.

Critics of Worldcom say its new plan to reorganize is unfair, because if and when the court allows it to emerge from Chapter 11 bankruptcy, the company then would be permitted to remove its massive debts from its accounting ledgers, and be allowed to continue operating. The company presided over accounting fraud to the tune of close to $11 billion in overstated revenues, and false profits, several investigations of the company and potentially culpable individuals are ongoing.

Several companies have been lobbying the Federal Communications Commission that MCI-WorldCom should be liquidated and permanently put out of business. But Pierce says the new MCI may well be on the road to recovery.

"They are doing a lot of the right things. For instance, they are doing a much-needed overhaul of their back office system," Pierce said.

Under the new reorganization plan, the company would be left with between $4.5 billion and $5.5 billion of debt, while eliminating $36 billion of debt. There is expected to be a court hearing to confirm the bankruptcy plan is expected in August.

Under the current bankruptcy reorganization proposal, WorldCom bondholders would get 36 cents of new debt and equity for each dollar they are owed. MCI creditors would get about 80 cents on the dollar and bondholders of the company's data subsidiary Intermedia would get 94 cents on the dollar.

WorldCom's stock and bonds are expected to have a total market value of about $12 billion as the company emerges from bankruptcy. The company is expected to issue a new stock under its new MCI corporate moniker.

MCI's new three-year business plan, says the company is expecting to generate $24.7 billion of revenue in 2003, boosting that 4.5 percent to $25.8 billion in 2004, and 7 percent to $27.5 billion in 2005.

But while a judge still needs to approve MCI's reorganization plan, Pierce says the company needs to develop a coherent pricing strategy.

"I see a lot of responses to MCI's customer RFPs. But their pricing strategy seems erratic. They are bidding too high on some deals and underbidding on others. They need to take a more rational pricing approach," Pierce said.