WorldCom files world’s biggest bankruptcy
Besieged telecommunications firm WorldCom has filed for Chapter 11 bankruptcy protection. The action dwarfs Enron's spectacular meltdown, since WorldCom claimed $103.8 billion in assets at the end of Q1, eclipsing last year's $63.4 billion Enron failure. As such, it amounts to the largest bankruptcy in commercial history.
WorldCom's non-U.S. subsidiaries are not included in the filing and will also continue to operate normally, the company said.
The move came less than a month after the No. 2 U.S. long-distance telephone and data services company - which serves over 20 million Americans and carries half the world's Internet traffic - fired its chief financial officer, Scott Sullivan, after discovering improper accounting for close to $4 billion in expenses. Arthur Andersen had been the company’s auditors. The US Justice Department had begun a criminal investigation.
John Sidgmore, who in April took over from WorldCom’s cavalier CEO and founder Bernie Ebbers, told the Associated Press: "The first priority was to stabilize the company financially.”
In a release, WorldCom revealed it had secured approximately $2 billion debtor-in-possession financing, including a commitment of $750 million from Citibank, N.A., JP Morgan Chase Bank and General Electric Capital Corporation. The facility will augment the company's cash flow during the Chapter 11 proceedings.
"We don't think that there will be any significant impact on the employees and vendors, for that matter, and we should have plenty of cash to make it," Sidgmore added.
Sidgmore said WorldCom would divest non-core assets, such as its wireless resale business and possibly the firm’s Latin American assets. He ruled out a sale of UUNet, MCI or any of the company’s core assets.
Shares of WorldCom had hit 6 cents days before the Chapter 11 filing, compared with highs of $64 during the late 1990s boom. Yet analysts predicted the company would not be forced to close its extensive network.
When WorldCom’s accounting fraud was revealed in June, Sidgmore claimed “our senior management team is shocked by the discoveries” of an expenses fraud that hinged on booking operational expenditure as a capital expense in order to postpone applying it against earnings and amortise its cost over many years. In this way, profits could be artificially inflated compared with levying the charges at once.
Generally accepted accounting principles (GAAP) dictate that operating expenses must be deducted immediately from profits. WorldCom’s sacked CFO had allegedly transferred WorldCom’s operating costs and treated them as capital expenditure.
Federal Communications Commission Chairman Michael Powell said in a statement shortly after the filing: "While I am deeply concerned by this development, I want to assure the public that we do not believe this bankruptcy filing will lead to an immediate disruption of service to consumers or threaten the operation of WorldCom's Internet backbone facilities."
"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. To that end, I am contacting WorldCom to reiterate that the company's regulatory obligations will continue to apply.
“We will continue to gather information relevant to WorldCom's operations and advise the company of its regulatory obligations to its customers. This Commission stands ready to intervene in bankruptcy proceedings as necessary to ensure that the bankruptcy court is aware of and considers our public interest concerns," Powell added.
WorldCom had said it would restate results for 2001 and Q1 of 2002 admitting net losses in one of the biggest revisions in commercial history. The firm also slashed 17,000 jobs in an attempt to staunch huge $30 billion debts it amassed in the 1990s and to save an estimated $900 million a year.