WorldCom Debt Deadline Looms

As allegations of accounting fraud spread further back in WorldCom's (WCOME Quote) financial history, a critical interest payment scheduled for Monday looms over the company's fate.

The payment deadline strikes on the heels of new findings by a congressional investigation that former CFO Scott Sullivan ignored internal warnings about accounting abuses dating back to 2000. Sullivan was fired last month upon revelations that $3.8 billion in expenses were fudged to enhance the company's flagging earnings performance.

If WorldCom defaults on a $79 million bond coupon payment Monday, the move would likely trigger a bankruptcy filing within a month, say analysts.

A company spokeswoman declined to comment.

To avoid falling into the hands of bondholders in bankruptcy court, the teetering telco is likely to use a 30-day grace period if it misses the scheduled payment, to arrange a so-called prepackaged restructuring, says debt analyst Glenn Reynolds of CreditSights.

Under a prearranged agreement, WorldCom could negotiate a debt-for-equity swap with some of its major creditors. The prepackaged bankruptcy would allow WorldCom to continue operations with minimal interruption and would also help the company retain customers and employees in the hopes of re-emerging later on.

Cash has grown exceedingly tight as WorldCom struggles to stay afloat. Last week the company successfully fought an effort by its bankers to freeze its $2.65 billion credit line and canceled dividend payments due to MCI shareholders. But citing "invoicing issues," WorldCom has stiffed some European phone companies on service payments and runs the risk of losing some overseas connections.

Reynolds says a prearranged bankruptcy would be the best of two increasingly inevitable worst-case scenarios, and would allow the company to avoid full-scale restructuring and asset sales via bankruptcy court, says Reynolds.

But of course as investigators uncover more potential fraud, WorldCom may not have the luxury of an alternative. Creditors could decide to accelerate the process and squeeze what money they can from the company and its assets now, says Reynolds.

"Bondholders may just want to drive a stake through this beast and start the restructuring," says Reynolds.