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WorldCom Inc.’s unsecured creditors will convene today at a New York hotel to forge an official committee that will represent their interests in the largest Chapter 11 filing ever. It could be a long day. Unsecured creditors’ committees often have seven to 15 members. WorldCom has thousands of unsecured creditors with widely disparate agendas and competing claims for the company’s assets. Ensuring representation for all those viewpoints on one panel will be a monumental task. The players include vendors and suppliers whose bills were vaporized in the bankruptcy filing, bondholders who purchased notes at par and would lose money if they receive less than face value, distressed players who bought at pennies to the dollar and the many banks that extended the company unsecured loans. One source from the distressed market compared the varied collection of creditors to an abstract expressionist painting. Bondholders have the largest chunk of WorldCom’s more than $40 billion in debt and are broken into three groups. The WorldCom holding company has notes worth $24 billion. MCI subsidiary investors have $2.6 billion in bonds and $750 million in preferred trust stock. The Intermedia Corp. subsidiary has about $1.2 billion in bonds and $574 million in preferred stock. The three groups have pledged to cooperate in the proceedings, but bond market sources say fault lines are visible. The MCI bondholders have claimed structural seniority over the other bondholders, because the most profitable assets are held by the subsidiary. They would be repaid ahead of the other bond groups. The Intermedia subsidiary has a $5.7 billion inter-company note that WorldCom owes it. A distressed player says the Intermedia bondholders will claim the note gives them higher standing than the main group of WorldCom bondholders. The source adds that investors who bought WorldCom notes in a May 2001 offering may fight for priority over the other holding company bondholders. They could argue that because WorldCom’s accounting problems began before the sale, they invested on the basis of fraudulent financial reports. Sources suggest that the mix of par and distressed investors may also lead to conflict. The par bondholders would lean toward the highest recovery; the distressed investors might be tempted by a lower but quicker return on their money. A distressed debt source says that many of the institutions holding WorldCom’s $28 billion in bond debt may be large institutions unable to sell when the bottom dropped out. “The total collapse occurred so fast,” the source says. “I suspect a big slug of these holders are the original buyers.” David Rosner of New York’s Kasowitz, Benson, Torres & Friedman who represents the MCI Group subsidiary bondholders, says his clients include a mix of par holders and distressed investors, but could not comment on the other groups. Lawyers for the WorldCom holding company and Intermedia bondholders did not return calls. Even among the distressed crowd there will be competing interests, depending on when the investors bought into WorldCom. Daniel Arbess, head of the special situations investing at Triton Partners, says there have been three waves of distressed investing in the notes. The first phase followed the resignation of former chief executive officer Bernard Ebbers on April 29, when the bonds dropped to around 40 cents on the dollar. Arbess says many investors purchased bonds then, thinking that a new credit facility would solve liquidity problems. The second stage immediately followed the June 25 announcement of $3.8 billion in accounting errors. Bonds dropped to the low teens, and later rebounded to the high teens when the new president and chief executive officer John Sidgmore said he was optimistic the company could stave off bankruptcy. Arbess would not discuss details of Triton’s investments, but said the firm was active in the second phase. The third stage began when portfolio managers began to realize a Chapter 11 filing was unavoidable. Prices of WorldCom bonds have dropped back to the low teens, while the MCI notes have recovered to their levels before the accounting fraud was announced. “With these various interests in the cap structure and multiple entry points one can expect to see a very lively discussion at the formation of the creditors committee, and as the committee’s work moves forward,” Arbess says. “The committee advisers will have their hands full balancing these interests.” Then there are the banks, who are on the hook for billions in unsecured loans. The institutions may have an interest in seeing WorldCom emerge from bankruptcy, because if the company becomes viable it could be a valuable client once again. Court filings state that Verizon Communications Inc.’s $121 million claim is the largest trade debt. The other regional Bells, who charge WorldCom to use their lines to complete calls, also have significant stakes. Trade debt aside, the Bells have another interest in the bankruptcy proceedings. If there were an asset sale, they would be potential buyers for either the entire company or some of its operations, like the MCI long-distance business. As earnings reports roll in, other WorldCom suppliers have disclosed their exposure to the company. Earlier this week, business and technology services company Electronic Data Systems Corp. announced a $100 million write-down from prebankruptcy receivables and other WorldCom-related charges. The final say over the committee’s composition lies with the U.S. Trustee for the second district, Carolyn Schwartz, who is also working on the Enron Corp. bankruptcy. The Enron unsecured committee originally numbered 15: five banks, five bondholders or their representatives, three energy companies, one surety company and a retired employee. One of the banks, an energy company, and the retiree have since dropped off the committee. Rosner says he is unsure what form the committee would take. He suggested there could be multiple committees; one for the WorldCom holding company and one for MCI, which owns many of WorldCom’s most profitable assets, for example. A source from the bond market said that the committee could even include distressed bondholders, because they have such a large stake in the company. Copyright �2002 TDD, LLC. All rights reserved.

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