WorldCom’s Day of Reckoning

As widely
expected
, WorldCom filed for bankruptcy protection
late Sunday, marking the largest bankruptcy in U.S. corporate history.

With creditors breathing down its neck and a dwindling pile of cash,
Clinton, Miss.-based WorldCom bowed to the inevitable, filing a petition
with the U.S. Bankruptcy Court of the Southern District of New York that
listed $107 billion of assets, dwarfing Enron’s $63 billion filing last
year.

The bankruptcy filing is unlikely to dramatically affect service for the No.
2 long-distance provider and the largest operator of Internet backbone. The
filing essentially protects WorldCom from its creditors while it puts in
place a plan to reorganize the company.

Along with the filing, WorldCom announced it lined up $2 billion of
debtor-in-possession financing, arranged by Smith Barney, JP Morgan and GE
Capital. The company said Citibank, JP Morgan Chase and GE Capital had
already committed $750 million, which would fund the company’s operations
during reorganization. The facility is subject to approval by the bankruptcy
court.

“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,” WorldCom CEO John Sidgmore said in statement. “We will emerge
from Chapter 11 as quickly as possible and with our competitive spirit in
tact.

In the battered telecom sector, Chapter 11 is certainly not new. WorldCom
joins the ranks of companies like Global Crossing, Williams Communications,
360networks, XO Communications, and Winstar.

Industry analysts have pointed out that bankruptcy is far from the end of
the WorldCom story, with it carrying some advantages, like deferring
payments to bondholders.

“Companies emerge from bankruptcy over and over again,” said Giga
Information Group analyst Lisa Pierce. “It’s reasonably certain that
[WorldCom] will emerge.”

Earlier this month, Sidgmore issued assurances that WorldCom’s backbone
network would not see any disruption
.

WorldCom’s bankruptcy comes less than a month after it admitted
inflating its profits by $3.8 billion
over a year and a half’s time,
rocking a telecom industry already reeling over a string of bankruptcies and
mountains of debt. Despite promises to quickly right the ship, Sidgmore
could not sway the reluctance of WorldCom’s creditors, many of whom ponied
up $2.65 billion in loans just weeks before the restatement, to give the
company leeway.

The hard line pursued by its creditors, combined with the insistence of many
WorldCom venders for up-front payments, quickly eroded the company’s
financial situation. While Sidgmore declared WorldCom integral to U.S.
national security, Bush administration officials, from Secretary of Defense
Donald Rumsfeld to Federal Communications Commission Chairman Michael
Powell, downplayed any threat from a WorldCom bankruptcy.

Last night, Powell told The New York Times that he did not think the
bankruptcy filing would not disrupt customer service.

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