WORLDCOM MAKES LARGEST CHAPTER 11 FILING EVER

Bankruptcy filing, which had been expected over weekend, came within weeks of company’s divulging $3.8 billion in erroneous accounting of expenses, including access charge costs. WorldCom, MCI and its affiliates said Mon. they had $2 billion in new senior secured financing from JPMorganChase Bank, Citibank and GE Capital. WorldCom said that financing “together with cash generated from ongoing operations will be more than sufficient to restructure and emerge from bankruptcy.” Company reportedly told Bankruptcy Court that it had $107 billion in assets. WorldCom CEO John Sidgmore said in news conference that he didn’t expect any core assets to be sold off. He said company’s reorganization could continue at least through first quarter of 2003 and perhaps could take longer.

President Bush expressed concern about effect of bankruptcy on WorldCom employees. Responding to questions from news media during visit to Advanced Photon Source Lab in Argonne, Ill., Bush said he thought market “has already anticipated the WorldCom decision” but “I worry that people will lose work.” Solution is for Congress to pass legislation aimed at limiting corporate abuses, he said. “I'd like to see the bill on my desk prior to the recess.”

Powell said he had contacted WorldCom to reiterate “that the company’s regulatory obligations will continue to apply.” He said: “This Commission will act vigilantly, and to the full extent of its statutory authority, to protect the integrity of the telecommunications network and protect consumers against any abrupt termination of service.” He said Commission “stands ready” to intervene in bankruptcy proceedings to ensure that agency’s public interest concerns are taken into consideration.

Powell, in letter Mon. to WorldCom’s Sidgmore, emphasized company’s regulatory obligations in bankruptcy proceeding. “Because of WorldCom’s size and scope, it is particularly important, both to millions of consumers and to the integrity of the nation’s communications network, that WorldCom integrate its regulatory requirements into its planning during the bankruptcy process, and that it takes those requirements seriously,” Powell wrote. He reminded Sidgmore that if any restructuring or asset sale by WorldCom involved transfer of control over licenses granted by FCC, Commission must grant approval. If WorldCom’s Chapter 11 filing leads to discontinuance of services, for operations covered under Sec. 214 of Communications Act, it must meet notice requirements of FCC rules, Powell said. He stressed that: (1) Process is meant to give customers “reasonable opportunity” to transition to new service provider and “the Commission will act promptly and vigilantly to ensure that customers are provided this opportunity.” He said FCC would intervene in bankruptcy proceedings to advise court if WorldCom or anyone else involved in process took steps that would result in termination of service without notice. (2) 31-day period after which WorldCom could discontinue service after FCC released public notice was “minimum period, and the Commission may extend it if consumers would be unable to receive service or a reasonable substitute from another carrier, or if the Commission otherwise finds that the public convenience and necessity is adversely affected by the discontinuance.”

USTA wrote to Powell Mon. seeking assurance that access charges, unbundled network element (UNE) payments and other routine compensation to ILECs from WorldCom would continue during reorganization period. It asked FCC to establish “clear mechanism for the recovery of any uncollectible costs” that WorldCom owed to ILECs. “We can do this the right way or the wrong way,” USTA Pres. Walter McCormick said in letter. “The FCC could force healthy local exchange carriers to provide hundreds of millions of dollars a month in services to an unstable company without much hope of seeing those bills paid or it can offer concrete assurances to those carriers that they will be paid to keep those calls going through.” McCormick said “clearly it’s in the best interests of consumers, the telecom economy and the nation to ensure that companies that provide telecom services are compensated for doing so.” He said protections sought by USTA were consistent with U.S. bankruptcy law. AT&T spokesman said details of USTA’s request revealed “outrageous display of greed,” saying Assn. proposed to put telcos ahead of other creditors. AT&T official also took issue with USTA requests that: (1) Incumbent LECs be permitted to pass some portion of unpaid debt on to their other customers. (2) ILEC suppliers be permitted to secure deposits or in some cases payment in advance “from those connecting carriers for which there is a demonstrable financial concern.”

Justice Dept. officials said “extraordinary nature of the case,” including WorldCom’s billions in assets, prompted its Office of the U.S. Trustee (OUST) to request independent examiner. Examiner’s duties would include investigating for fraud, misconduct and mismanagement, as well as preserving company records, senior DoJ official said. He said Justice had requested examiners in other bankruptcy cases, including Enron, but said it wasn’t common practice. OUST counsel met with WorldCom counsel, who agreed not to challenge motion. Senior DoJ official said that although federal statutes said bankruptcy judge “shall” appoint examiner in such cases with large assets and where party requests examiner, judge isn’t obligated to do so. Official said it was important to maintain transparency and public trust in this case. “A case of this size screams for an examiner,” the Justice official said.

SEC already had secured court-appointed monitor for WorldCom, but DoJ official said OUST examiner generally wouldn’t duplicate work of SEC’s monitor. Justice Dept. also is conducting criminal investigation of WorldCom, which official said would be separate from work of examiner, who would conduct independent review of bankruptcy proceedings and wasn’t acting as DoJ representative. Report must be filed with court 90 days after examiner’s appointment, but time could be extended if needed. OUST will pick examiner, but it must be approved by court, senior official said.

In filings in Bankruptcy Court, WorldCom stressed national security and economic implications of its network’s continuing to operate. In making case for why it should receive $2 billion in post-Chapter 11 petition financing, company said if it were unable to obtain adequate operating liquidity, that could result “in a permanent and irreplaceable loss of business.” It said that would cause “a loss of value to the detriment of WorldCom and its creditors and, more importantly, may disable the national and international voice and data transmission infrastructure.” Without cash to continuing operating, WorldCom said long-term negative impact on international voice and data infrastructure would be “alarming.” It said: “If WorldCom is unable to obtain financing and is forced to shut down its operation, a key backbone of the world’s voice, data and Internet network will collapse.”

WorldCom described itself as “provider of network services for critical applications” for U.S. govt. Among its federal customers are FAA, for which it provides services for air traffic control applications, U.S. Postal Service, Defense Dept. WorldCom said it provided long distance voice and data services for House of Representatives, Senate, General Accounting Office “and virtually every other government agency.” Late Mon., bankruptcy court approved $2 billion debtor-in-possession financing plan outlined by WorldCom.

Meanwhile, company named 2 new members to its board: Former Attorney Gen. Nicholas Katzenbach, who now is attorney in private practice, and Dennis Beresford, former chmn. of Financial Accounting Standards Board who now teaches accounting at U. of Ga. Both were appointed to special investigative committee of board that is conducting independent review of company’s accounting practices and financial statement preparation, WorldCom said. Panel “will take on the oversight role with respect to the previously announced investigation led by William McLucas into these matters,” company said.