WorldCom Feels the Freeze
More bad news for WorldCom. On July 17 in New York, U.S. District Court Judge Jed Rakoff ordered a freeze on $2.5 billion of its assets. For 80 days, WorldCom (WCOME ) will be forbidden from selling stock in any of its domestic divisions. These assets are intended to provide some security for the company's creditors, which are owed a total of $28 billion. Rakoff is also presiding over the Security & Exchange Commission's civil case against the telecom giant.
The freeze is the latest in a series of developments that are making any hope of a quick reorganization and turnaround of WorldCom seem less and less likely. WorldCom's bank lenders, which are owed $2.65 billion, have been aggressively trying to secure themselves a senior position -- one where they are paid back first -- should the company file for bankruptcy.
In exchange for the asset freeze, banks have agreed to hold off on litigation against WorldCom for 70 days. On July 12, these banks filed a restraining order against the telecom in an attempt to freeze its cash, which was tossed out of court. A cash freeze would essentially shut down WorldCom. Bondholders carrying $24 billion in outstanding debt would be on the same level as bankers should WorldCom go the Chapter 11 route.
So far, though, the negotiations have done little but drive a wedge between the bank lenders and bondholders. Executives were hoping for a prepackaged bankruptcy, which would require all creditors to agree to most terms and could be worked through in as little as three months. Now, most WorldCom creditors say there's little to no chance of that happening.
Already, bondholders and the company's bankers are fighting on another court front. Three California public pension funds, representing $275 billion in assets, said on July 16 they would sue the bank underwriters of WorldCom bonds issued in May, 2001. JP Morgan Chase and Citigroup were the lead underwriters of those bonds. JP Morgan has lined up about $2 billion in debtor-in-possession (DIP) financing for WorldCom.
The telecom is already in default on its $2.65 billion bank loan. And on July 17, Standard & Poors cut some of WorldCom's debt to "D," or default. The company missed $74 million in debt payments on July 15. WorldCom has a 30-day grace period in which to make the payments, but S&P said it thought it would be "unlikely" that the telecom will be able to pay.
By Heather Timmons in New York