WorldCom to declare bankruptcy? - Tech News

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WorldCom to declare bankruptcy?

By Tiffany Kary
Staff Writer, CNET News.com
May 10, 2002, 2:15 PM PT

update As WorldCom's financial situation darkens, analysts say bankruptcy could be just around the corner. Even if it isn't, the telecommunications company and its competitors are in for a rough ride for the next few years, according to Wall Street analysts.

Ratings firms slashed WorldCom's debt to "junk" status Thursday, raising the likelihood that the company will have to declare bankruptcy in order to restructure its business. While WorldCom, which could have $32 billion in debt by the end of the year, has said its customers aren't defecting, analysts say the company is bound to suffer as customers get nervous. Rivals like Sprint, AT&T and Qwest could also have a tough time.

"The bigger problem is going to be two, three or four years out. It's a long-term situation," said analyst Timothy Horan from investment bank CIBC World Markets. He predicts that the change to WorldCom's debt rating and the rejiggering of the company's current financing agreements will cost the company more in the long run than if these changes didn't occur.

Telecommunications companies have already been suffering as price wars, excess network capacity and a weak economy have taken their toll on the industry. WorldCom has been hit especially hard; the Securities and Exchange Commission launched an investigation into the company's finances, and CEO Bernard Ebbers resigned in late April.

The company's vice chairman, John Sidgmore, has succeeded Ebbers, and he is pledging to turn the company around. That has led to speculation that WorldCom could get acquired. But after Thursday, analysts are talking more about the possibility of bankruptcy.

Moody's Investors Service on Thursday cut the company's long-term debt rating down three notches, and its short-term rating down two notches. The investment ratings company added that it could even cut the long-term rating again. Shares were down 43 cents, or about 21 percent, at $1.58 on Friday.

WorldCom said in a statement Thursday that Moody's decision to lower its rating wouldn't affect its bonds or credit arrangements because it had already renegotiated one of its loans. The company had received a waiver, which nullified the effects of any changes to WorldCom's debt rating on its loans. The company said Moody's rating change would therefore not affect its liquidity.

However, the company is still in negotiations on its $8 billion line of credit with banks, some of which is due in June. The company said it has a $1.6 billion bank credit line that expires in June 2006, and a $3.75 billion credit line that expires on June 30, 2002.

Analysts say the change to the company's debt rating could affect its negotiations. "Given the ratings downgrades and the declining cash flow, renegotiation (of loans) will be much more expensive," Horan said.

"At the end of the day, renegotiations will lose them about $500 million in liquidity," said Rick Grubbs, analyst at securities firm Credit Lyonnais Securities.

Analysts say the company's financing problems make bankruptcy a distinct possibility. Grubbs gives the odds of a bankruptcy at about 50 percent. "I don't think anyone will know that for sure until they do a complete asset review," he added, referring to the company's plan to try to sell off some of its assets to pay debt. The review is scheduled to take place over the summer.

Customers to flee?
Another blow to WorldCom could ensue as customers seek to diversify their businesses with other companies or defect entirely.

"I'm taking my revenue estimate down by $1 billion this year because we think there will be customer attrition," Grubbs said. The average estimate for WorldCom's fiscal 2002 revenue is around $20 billion, according to First Call.

Frank Governali, an analyst at investment bank Goldman Sachs, said in a research note Friday that he believes recent events will "make adding new customers more difficult."

WorldCom management said it contacted its top 100 customers, and few are considering defecting because of the company's financial troubles. The action suggests, however, "that WorldCom is worried about its perception in the market," said analyst John Hodulik, at securities firm UBS Warburg, in a research note.

"They've only been in two months of meltdown," said Horan, who predicted that at the very least, customers will soon diversify by doing business with more of WorldCom's competitors.

But WorldCom's troubles aren't expected to help out chief rivals like Sprint and Qwest, which also have cash-flow problems. "WorldCom's problems will likely cast a further pall on other leveraged telecom carriers with perceived liquidity issues--primarily Sprint and Qwest," Horan said.

Only the Baby Bells, or RBOCs (regional bell operating companies), such as BellSouth, SBC Communications and Verizon Communications are expected to benefit. "The best-case scenario is that WorldCom stays solvent for the next two years, with the (Baby Bells) picking up market share from WorldCom," Horan said.

If WorldCom does declare bankruptcy, it will most likely be of the Chapter 11 variety, however, which means customers should be willing to stick around. "Everyone thinks that when you file for Chapter 11 you turn out the lights, but it's not true. Customers shouldn't be that affected by it," Grubbs said.