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As Congress prepared to administer the obligatory public flogging of current and former WorldCom Inc. executives, the embattled company’s banks and bondholders began jockeying for position in Chapter 11 proceedings that appear increasingly unavoidable. The House Financial Services Committee announced Thursday that it would issue subpoenas to WorldCom’s former chief executive officer, Bernard Ebbers, its current CEO, John Sidgmore, its former chief financial officer, Scott Sullivan, and a Salomon Smith Barney Inc. telecommunications analyst, Jack Grubman, who consulted for the company during many of its acquisitions. Facing the uncertain future, WorldCom’s bankers, led by Bank of American Corp. and including Citigroup Inc. and J.P. Morgan Chase & Co., must decide whether to put new money into the Clinton, Miss.-based long-distance provider or enter into a bankruptcy process on the same level as company’s bondholders. Rather than attempt to repackage two existing bank facilities totaling $4.25 billion, the banks may choose to offer WorldCom debtor-in-possession financing. By providing DIP funds, any claim by the banks to the company’s assets would be senior to WorldCom’s bondholders. Because Tuesday’s disclosure showed that WorldCom inflated its cash flow figure since the start of 2001 by $3.8 billion, the banks could demonstrate that the company had long been operating in violation of covenants tied to its bank facilities. If the banks can prove WorldCom was in default, they might be able to prevent the company from spending any of the $2.65 billion bank facility it drew down in May. The disclosure has already jeopardized the continued existence of a separate $1.6 billion credit facility. In either case, the banks would prefer to secure their investments against the company’s assets before WorldCom files for bankruptcy. At present, the banks and WorldCom’s bondholders have equal claim to the company’s assets in the event of a bankruptcy. “The dilemma for the banks is do they give more money to WorldCom in exchange for being first in line to the assets,” said Dean Kartsonas, a telecom fund manager at Federated Investors Inc. “It could very well be a case of throwing good money after bad.” Then again the banks are under pressure to recover as much of their original investment as possible. Meanwhile, bondholders, said a trader, are pushing get into the ongoing discussion between WorldCom and its banks in order to protect their own position. Because WorldCom has ample cash — $1.6 billion at the end of the first quarter in addition to the $2.65 billion credit facility — the company has until November to cover $60 million in maturing debt and make $2.3 billion in cash interest payments. But it remains doubtful that banks would allow the company to expend money for bondholders. Technically, WorldCom has sufficient time to prepare a prepackaged bankruptcy plan. It could enter into negotiations with both its bank lenders and unsecured creditors on a plan that might speed up a bankruptcy process. However, since the Securities and Exchange Commission filed a civil lawsuit Wednesday alleging fraud and Congress is clamoring for its own investigation, WorldCom’s problems are hardly limited to its immediate financial needs. For Sidgmore, who took over in April as WorldCom’s chief executive after Ebbers was forced to resign, the revelation that the company booked $3.8 billion in expenses to boost profits has had the unintended impact of speeding his own plan to jettison unprofitable parts of the business to concentrate on areas that promised growth. Already, Sidgmore has said he aims to sell or shut down WorldCom’s wireless resale business and consider unloading its stakes in the Brazilian long-distance company Embratel Participacoes SA and the Mexican long-distance provider Avantel. Selling noncore assets to load up on cash may be essential to offset the likelihood that large business customers, wary about the WorldCom’s long-term solvency, would look for other providers. Longer term, Kartsonas said, WorldCom is likely to evolve into something similar to the company that existed before Ebbers and Sullivan purchased MCI Communications in 1998 for $49 billion: a fiber-optic provider focused on larger, Fortune 500 corporations. “They have a huge hurdle here,” Kartsonas added. “Once they do emerge it will be on a much smaller scale.” �Copyright 2002, The Deal, LLC. All Rights Reserved.

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