The fraud will almost certainly prompt WorldCom's banks to foreclose on its $30 billion debt, driving the company into Chapter 11 bankruptcy. It will also hit customer confidence, raising the specter of mass defections - hitting creditors' chances of recovering their debts. Nor is it good news for other indebted telcos: they will find it even harder to raise money going forward.
US telecoms group WorldCom has fired its CFO, Scott Sullivan, after the company discovered that $3.8 billion of operating expenses were wrongly booked as capital spending. WorldCom says it actually made losses for full year 2001 and Q1 2002, compared to reported profits of $1.4 billion and $130 million respectively. WorldCom shares fell 75% in after-hours trading.
The latest scandal looks set to kill WorldCom's recovery hopes. Former CEO Bernie Ebbers built the company into a $180 billion behemoth, but saddled it with $30 billion in debt. The collapse of the telecoms boom took a severe toll: even before Tuesday, WorldCom's market capitalization had fallen to just $2.5 billion.
However, it looked on track to secure a $5 billion credit line and cut costs in a restructuring. With 20 million domestic customers and thousands of enterprise clients, WorldCom should have been able to keep going - even if this required a debt-for-equity swap.
The fraud changes everything. It isn't even attributable to a cunning, rogue CFO: generations of crooked boards have boosted profits by booking operating expenses as capital. The revelations will destroy bankers' trust in the current management, as well as breaching WorldCom's banking covenants. Bankruptcy seems inevitable.
But it's not just WorldCom's shareholders who'll lose out. Many of its business customers depend on telecoms and data transmission, and therefore need absolute confidence in their telecoms provider. As KPNQwest customers have seen, troubled telcos sometimes threaten to shut operations down altogether - this fear will drive many WorldCom customers to switch provider, leaving creditors and employees high and dry as well.
The impact will also be severe for other telcos, many of which are heavily indebted and need to keep lenders on their side. The WorldCom scandal will hurt creditor confidence - and this may well mean that weaker companies in the sector follow the former giant down the road to failure.
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