MCI emerges from Chapter 11

The company formerly known as WorldCom has returned from bankruptcy protection with a new identity, but compensation claims from its accounting fraud may still prove an expensive liability

MCI, the telecom giant formerly known as WorldCom, finally came out of Chapter 11 bankruptcy protection in April after being tied up in nearly two years of negotiations with its creditors.

MCI has now shed some $35 billion in debt from its balance sheet, and the newly reorganised company will carry about $5.7 billion of debt and more than $6 billion in cash, much of which will be used for payment of claims and settlements.

The telecom’s reorganisation plan, confirmed last October by the US bankruptcy Court for the Southern District of New York, is now effective and the company has begun to distribute securities and cash to pay off its debts.

WorldCom lodged a record $104 billion Chapter 11 filing in July 2002, after it was discovered that the company had overstated its earnings by a massive $11 billion – the largest accounting fraud in US corporate history.

Under the reorganisation plan, the company will make a record $750 million payment to the Securities and Exchange Commission: $500 million in cash and $250 million in stock. In accordance with the Fair Funds for Investors provision of the Sarbanes-Oxley Act, eventually those funds will find their way to investors who lost money from WorldCom’s accounting fraud and subsequent bankruptcy.

Most WorldCom bondholders will receive 35.7 cents on the dollar, in a combination of new MCI shares and bonds. To this end, MCI has issued $5.66 billion in senior notes with maturities of three, five and 10 years, and initial coupons of 5.908%, 6.688% and 7.735% respectively. The initial coupon rates on the notes are subject to change after MCI has applied for and received ratings for the notes from Moody’s and Standard & Poor’s.

However, MCI’s president and chief executive officer, Michael Capellas says: “We are emerging with a new board and management team, a sound financial position and a strong customer base, but our emergence is not the finish line, it’s the beginning of a new race.”

Analysts say the long-distance phone company faces a number of challenges in the coming months. For one, long distance is an increasingly tough business now that regional companies such as SBC and BellSouth offer long-distance services on top of their local offerings. At the same time, MCI has no wireless unit, and will have to struggle to compete in a falling price environment.

Furthermore, MCI has not seen an end to liabilities relating to the accounting fraud. A number of civil lawsuits continue to loom over its fortunes, and a group of 14 states have filed for $1.5 billion in back taxes that they claim MCI has avoided through a tax strategy designed by the company’s auditor KPMG.