Why WorldCom Will Be Left Standing


No company has been rocked harder by the wake of Global Crossing's bankruptcy than fellow telecom giant WorldCom (WCOM). Worried that the $35 billion Jackson (Miss.) carrier might be the next telecom giant to sink, investors have traded its stock down more than 70% in the past two weeks, to the $6 range. It didn't help that WorldCom recently reported fourth-quarter earnings that plummeted 60% from a year earlier. Neither did the disclosure that CEO Bernard J. Ebbers has borrowed $375 million from his own company to cover margin loans.

Troubling news, for sure. But do these tidings portend an imminent collapse of WorldCom? Hardly. Industry observers note that, while deeply indebted, WorldCom has more than enough cash to cover its obligations in the next two or three years. And, unlike Global Crossing, WorldCom has a stellar roster of giant customers, including FedEx and AOL Time Warner. These companies hire WorldCom because it owns and controls the world's largest international data network, with an estimated market value of $10 billion. "To question WorldCom's viability is utter nonsense," says Ebbers.

Still, WorldCom has a tough road ahead of it. What scares investors most is its $30 billion in debt. It wasn't a problem when the company's hot data and Internet businesses were growing 50%-plus in 2000. But now growth in these core businesses has fallen to the 10% to 20% range, and investors fret that debt has become a ball and chain: WorldCom's interest payments exceed $1 billion annually.

REDUCED TO JUNK? If debt isn't reduced -?- and soon ?-- some industry observers worry that WorldCom's credit rating could be reduced to junk. That would cut off credit and raise borrowing costs, and in a worst-case scenario force WorldCom to seek Chapter 11 bankruptcy protection. "WorldCom mortgaged its future growth with a heavy debt burden," says Scott C. Cleland, a telecom analyst at Precursor Group.

Unlike Global Crossing, though, WorldCom has already recognized the severity of its problem. In the past year, the company has moved to clean up its balance sheet. WorldCom has slashed its payroll by some 9,000 workers and reduced capital spending by 30%. It has bought back all of its high-rate commercial paper and has $10 billion in credit available.

Its cash flow is now positive for the first time in years, and the company expects to generate $3 billion annually in cash by 2004, more than enough to cover the $4.5 billion in debt maturing in the next three years. "These are challenging times, and we do not take them lightly," says Scott Sullivan, WorldCom's chief financial officer. "But there are no triggers out there that would call for the repayment of debt."

$20 BILLION WRITE-OFF. Still, some investors and industry observers worry that an economy that's still quite sluggish will sap WorldCom's ability to meet interest payments. No one is saying this is about to happen. But credit-rating agencies are concerned enough to have revised WorldCom's investment-grade debt ratings somewhat. Standard & Poor's recently lowered WorldCom's debt to negative from stable, though S&P kept WorldCom's investment grade of BBB+. Says S&P telecom analyst Rosemarie Kalinowski: "The company needs to reduce its debt and improve cash flow."

Another concern: Sometime this year, WorldCom will write off up to $20 billion in goodwill covering MCI Corp. and some of the other 60 companies it bought during the 1990s. However, big as it is, such a write-off is far from life-threatening. Indeed, it would take a charge of $50 billion or more to push WorldCom's debt-to-capital ratio to a level that would violate its loan agreements.

Still, massive write-offs are a comeuppance for a company that many analysts have long associated with aggressive accounting. During the boom years, WorldCom liberally booked expenses as capital investments that could be amortized, a strategy that made earnings appear to be larger than they really were. In 2000, WorldCom capitalized $925 million in costs associated with developing in-house software, according to a footnote in its annual report.

ENVELOPE PUSHING. WorldCom also capitalized, rather than booked as an expense, the cost of building some of its own transmission systems, such as interest and salaries of employees involved in the construction, notes a consultant who has worked with the company. Indeed, it capitalized $842 million in such expenses in 2000, according to its financial reports. "WorldCom always pushed the envelope" in its accounting practices," says the consultant, who asked to remain anonymous. WorldCom doesn't dispute the description of its accounting and says it stands by its methods as being appropriate.

Yet in the post-Enron era, analysts and investors alike will be scrutinizing every report for signs of inappropriate accounting. And given its go-go past, the question now is whether the company has done enough and acted quickly enough to clean up its balance sheet. The consensus on Wall Street is that it has. "WorldCom is still the fastest-growing telecom mega-cap company," says Blake Bath, a telecom analyst at Lehman Brothers. While it's hardly in the clear, WorldCom is no Global Crossing. By Charles Haddad in Atlanta


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