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Bankruptcy
It is widely expected that WorldCom will soon file for Chapter 11
Bankruptcy. Banks are pressing for Chapter 11 bankruptcy because
the banks that provide the loans will be the first to collect payments.
The $2.6 billion loan WorldCom recently received from 27 banks is
unsecured, meaning the lenders would have a claim on WorldCom's
assets in the event of a bankruptcy filing. Without bankruptcy,
the banks do not have collateral on the loans they have already
given. The banks would want to lend the company more money to keep
it functioning, expecting the company to eventually be able to repay
them. Banks will also have first shot at WorldCom's assets if it
does go under.
The
benefit of bankruptcy for WorldCom is that employees get paid, customers
get service, WorldCom retains possession of assets and a little
breathing room to reorganize. Banks that provide the loans are in
favor because they will be first in line to be repaid. If Chapter
11 is successful, WorldCom can continue to operate with a restricted
debt load, operate more efficiently than before and preserve jobs
and assets.
If WorldCom declares bankruptcy, it will lose credibility and many
large corporate and government clients that typically do not do
business with companies in Chapter 11. If Chapter 11 is not successful,
the next step is shutting down and liquidating assets.
Analyst do not believe WorldCom's system will be allowed to go under,
since it would cause havoc for the Internet backbone as well as
long distance users. If WorldCom enters bankruptcy proceedings,
it likely will emerge debt-free or sell its networks to other vendors.
Typically in Chapter 11 bankruptcy, the U.S. Trustee will appoint
one or more committees to represent stockholders and creditors to
work with the company to develop a reorganization plan. The plan
is voted on by creditors, bondholders and stockholders, and then
confirmed by the court. Even if they vote to reject the plan, the
court can still approve the plan if it treats stockholders and creditors
fairly. The plan must comply with Bankruptcy Code. Confirmation
could take several months. Management continues to run daily operations
but significant business decisions must be approved by the court.
Unfortunately, the 17,000 WorldCom employees who have lost jobs
and retirement funds could also lose during bankruptcy. Severance
is typically paid in a lump sum. WorldCom has elected to spread
it out into multiple payments. If the company files bankruptcy before
paying severance packages, employees will be bumped to the back
of the line with other low-ranking creditors and could possibly
see their severance capped. The company is possibly delaying these
payments to conserve cash.
Who Gets Paid first in Bankruptcy?
1. Secured Creditors- often the banks.
2. Unsecured Creditors- banks, suppliers and shareholders
3. Stockholders
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