WorldCom $40bn in Debt - and Counting

WorldCom became America's biggest corporate failure yesterday with $40bn in debt and gaping holes in its accounts that could be even larger than the $4bn fraud that has already entered the record books.

Standing in front of a banner that proclaimed the telecoms company was "moving forward", John Sidgmore, the chief executive, admitted that he could not be certain that the extent of the company's accounting problems ended with the $4bn fraud that prompted angry questions about the integrity of corporate America.

With KPMG continuing to dig through the accounts, Mr Sidgmore said he had "no definitive answer" about the magnitude of the accounting problems. He warned that the company might not be able to give such an answer until the end of the year. Such uncertainty calls into question the company's plans to emerge quickly out of the Chapter 11 bankruptcy proceedings, which gives it protection from its creditors.

It failed to improve the bleak mood on Wall Street, which suffered another tough day yesterday. President George Bush once again tried to soothe investor nerves about the credibility of America's biggest companies as the Dow Jones index endured another rough ride.

Mr Sidgmore, pushed to lead the company after flamboyant founder Bernie Ebbers was ousted in April, tried to be upbeat yesterday. He hopes to restructure WorldCom and turn it into a bigger and better company in nine months, he said.

Mr Sidgmore, who may yet be ousted by creditors anxious for change before he is able to see through his bold ambition, made it clear that he will resist any attempt to break up the company during the bankruptcy process.

"The value is not in the switches and its pipes we have underground. It's in the 20 million customers," he said.

National security

WorldCom intended to fight hard to keep its customers, who rely on the company for access to the internet and wider telecommunications needs. WorldCom's networks also play a key role in America's national security.

Wall Street analysts, though, noted that the bravado did not necessarily reflect reality. The one-time go-go stock of the hi-tech boom has now left its shareholders - who once owned shares worth $50 each - with almost worthless paper.

Mr Ebbers, who designed the company on the back of a napkin in a Mississippi restaurant and turned it into a $100bn worldwide operation, claimed at the height of the dotcom boom that his company's shares were more valuable than cash. He is now thought likely to declare himself personally bankrupt as he has a $408m loan that he must repay the company.

During his glory days, Mr Ebbers's business prowess became legendary. He saw off British Telecommunications during a furious battle for control of MCI in 1997. Wall Street funded his ambitious and expensive spending spree.

Court filings yesterday showed that WorldCom, which employs 60,000 people in 65 countries, is saddled with a $40bn debt, even more than initial estimates, and it claims to have assets worth $107bn. This makes it by far the biggest company to file for Chapter 11 protection.

Mr Sidgmore said WorldCom had "fought hard and frantically" to avoid entering the history books in such an undignified manner. But the board was left little option after burning through $2bn of precious cash in the last two weeks to pay creditors who had brought forward demands for their bills to be paid.

By filing for protection, WorldCom was able to secure a much-needed $2bn loan - known as debtor in possession financing - that will give it enough financial power to keep operating while in the bankruptcy process. The three financial houses that provided this deal are Salomon Smith Barney, its long-time supporter on Wall Street, JP Morgan and General Electric Capital Markets Group.

They automatically go to the front of the queue for any pay-outs by the company while the remainder of its lengthy list of creditors are what Mr Sidgmore yesterday described as "fair game".

WorldCom's Chapter 11 filing has a far-reaching impact financially. It owes money in the form of loans to all the big names on Wall Street, such as JP Morgan and Citigroup, whose investment banking arm Salomon Smith Barney is facing a backlash for its unquestioning loyalty in recent months. It also needs to make payments to bondholders which are held not just by Wall Street firms but also big pension funds.

These bondholders, provided that WorldCom can undergo a restructuring, are likely to swap the debt for an equity stake in the group when it is finally freed from the bankruptcy court.

WorldCom must also pay bills for the so-called baby bells, the local telecoms groups which are expected to fight hard to protect their interests.

As he faced a packed courtroom in the southern district of New York late yesterday, Mr Sidgmore insisted that the company was taking steps to show creditors that it was making efforts to improve its corporate governance. Two new board members were immediately charged with setting up a special investigative committee to review the group's accounting practices. Nicholas de Katzenbach was an attorney general in the 1960s during the Johnson administration and Professor Dennis Beresford is a former head of the Financial Accounting Standards Board.

Mr Sidgmore tried to distance himself from what happened last year when the accounting errors took place. He insisted he was involved in strategy but had "no operational role" in the last few years.

Resignation calls

If he can survive the calls for his resignation, he aims to get WorldCom out of Chapter 11 in nine months - fast by American standards and particularly so given the scale of the challenge ahead. He cited Continental Airlines and Texaco as precedents for his ambition for the company to emerge bigger and better than before. This goal, though, depends on the actions of the courts and the ability of KPMG to clean up WorldCom's accounts. The demands of the creditors will also be vital; they could run out of patience and force the company to break itself up.

It will also require the company to hold on to customers - who have already raised concerns about the quality of its service - and attract new ones, a goal that is never easy for a company whose fate lies in the hands of America's increasingly busy bankruptcy judges.

Mr Sidgmore was adamant yesterday, though. "We will use this time under reorganisation to regain our financial health and focus, while operating with the highest integrity. We will emerge from Chapter 11 as quickly as possible and with our competitive spirit intact," he said.

For now, he is feeling the financial impact of WorldCom's pain personally, forgoing any bonus payments. It is a different story for the lawyers, though. One firm alone has already racked up $2m in fees from the filing. And the lengthy Chapter 11 bankruptcy process has only just begun.

The following are the biggest creditors listed by WorldCom in its filing for bankruptcy protection:

JP Morgan Trust Co (Indenture Trustee) $17.2bn

Mellon Bank (Indenture Trustee) $6.6bn

Citibank (Indenture Trustee) $3.29bn

JP Morgan Chase $3.0bn*

Bear Stearns $2.72bn*

Bank of New York $2.58bn*

State Street Bank $2.02bn*

Morgan Stanley $1.91bn*

Goldman Sachs $1.52bn*

Suntrust Bank (Indenture Trustee) $1.22bn

CitiCorp Services $1.08bn*

Deutsche Bank $1.01bn*

Boston Safe Deposit Trust Co $867.5m*

ABN Amro ING Baring (US) Securities $753.1m*

*Amount is also included in claim of indenture trustee.

Figures rounded