WorldCom Bankruptcy Poses Financial Risks to Other Phone Companies
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The crisis in the telecommunications industry just became worse. Even though WorldCom’s bankruptcy filing had been expected for weeks, its reality has created a cascade of problems in the interdependent industry of local and long-distance phone carriers, as well as their equipment suppliers. The two-year slump in telecommunications has been a major factor behind the limping economy and the falling stock market, with telecommunications stocks having lost about $2 trillion of value in the last two years. So, continued turmoil for the industry could have broader negative repercussions. “People can no longer ignore that telecom is cratering and is a major drag on the economy,” said Scott Cleland, chief executive of the Precursor Group, a consulting firm in Washington. WorldCom’s bankruptcy filing is unlikely to have much direct effect on its business customers or on residential callers, which include about 20 million people who have monthly long-distance service from the company’s MCI unit. Creditors and regulators are likely to ensure that the company’s network operations remain relatively intact in the months ahead. If anything, long-distance customers may benefit from further price breaks, as WorldCom will be under less pressure to maintain its revenue to meet payments to creditors. But because price wars have contributed to the telecommunications industry’s problems, further pressure on that front would add to the challenges facing other carriers, particularly the big long-distance companies AT&T and Sprint. Of more immediate concern to the other carriers, though, is the prospect of not being paid by WorldCom, which typically gives them tens of millions of dollars a month in the complex give-and-take by which carriers connect one another’s customers in a vast communications web. The industry’s largest trade group sent a letter over the weekend to the Federal Communications Commission, asking for permission to pass along the costs to their own customers if WorldCom falls behind on its network-connection payments. Nearly every telecommunications company — whether it is a carrier of phone calls like Verizon Communications or an equipment producer like Lucent Technologies — is owed money by WorldCom, and will have difficulty collecting these debts as WorldCom shields itself from creditors under bankruptcy court rules. Among the large regional phone companies, it is estimated that Verizon and SBC Communications are each owed more than $200 million by WorldCom, some of which they have already had difficulty collecting. It is unclear how much these companies can collect on such debts or whether they can hope to collect on the $100 million of fees WorldCom pays them every month to connect its customers to their networks. “We’re disappointed that they have taken this step,” said Peter Thonis, a spokesman for Verizon. “We plan to follow the situation closely to do what it takes to protect the interests of our shareholders.” Another huge regional phone company, BellSouth, plans to hold on to some of the money it collects as the billing agent for WorldCom customers if WorldCom fails to pay its connection fees, according to a spokesman, Jeff Battcher. He said WorldCom typically paid BellSouth about $80 million a month. WorldCom’s bankruptcy filing is also likely to weigh on revamping efforts already under way among other telecommunications companies, like Global Crossing and 360networks, themselves operating under bankruptcy protection. Creditors for those companies have had trouble finding buyers for their networks, or even parts of them. Now, as WorldCom looks to sell some of its assets, the glut of distressed properties will grow larger. The glut of capacity in communications networks, a result of overzealous investment during the telecommunications boom in the late 1990’s, is a big factor in the industry’s current slump. The huge run-up in stock prices allowed upstart companies, most notably WorldCom, to grow rapidly through acquisitions and inexpensive financing. The rising popularity of the Internet in that period helped stoke the network building frenzy. Executives at UUNet, an Internet “backbone” company that WorldCom acquired in 1996, were quoted as saying that Internet traffic would double every 100 days. As WorldCom’s accounting scandal has illustrated, the failure of Internet traffic to grow at anything near the predicted pace contributed to the pressure on its executives to create a facade of financial normalcy. |