MCI just ran into a bump on its smooth road to recovery.
The source of the discord is the company's trade creditors. In a filing with the court overseeing MCI's emergence from bankruptcy, they say they want a bigger piece of the pie that is being divvied up among bondholders and other business partners of the former WorldCom.
Charging that the company fraudulently shifted billions in expenses between operating units before last year's biggest-ever U.S. Chapter 11 filing, the group seeks to have a trustee appointed to better represent their claims. The legal memo, which was filed Thursday, charges that WorldCom's books were rife with intercompany accounting hijinks and that the senior credit holders cannot conduct an impartial investigation.
The legal challenge highlights the disparity between bondholders of WorldCom's MCI unit, who as preferred debtholders stand to collect some 80% of their original claims, and the trade creditors, who like many other stakeholders of the former WorldCom will recoup a paltry 30% of their claims. Shareholders will get nothing, as outstanding shares are expected to be canceled.
Former Compaq CEO Michael Capellas took the top job at MCI in November and soon after pledged to have the company back on its feet this year. So far, after a round of job cuts, a massive balance-sheet writedown and a timely
reorganization plan filing, Capellas has been on track with the turnaround.
While rifts among creditor classes aren't uncommon, some legal experts say the focus on suspicious cost-shifting between the WorldCom and MCI units gives the motion some probity and may cause a potential disruption to MCI's fast-track restructuring process.
It could be "easy to argue that this is a fundamental defect" in the reorganization plan, says Richard Tilton, a bankruptcy lawyer based in Wall, N.J., who has no ties to MCI Chapter 11 case. "Trade claims are for specific operating entities. From the creditors' perspective they can say, 'We sold a service to MCI, we invoiced it to a company that has assets, and now you have a plan that discriminates against us.'
"This presents a real possibility of delay," continues Tilton, who has represented various credit committees in other bankruptcy settlements. "It suggests that debtors should find a practical way of dealing with these creditors."
But some telecom industry observers are less optimistic about the trade creditors' chances of a better offer. While they say WorldCom could have shunted some expenses and debts over to the MCI business, this was merely an accounting shell game, since both units were part of the larger WorldCom parent company.
Plus, in addition to the effort to recover more of their losses, the trade creditors are mostly competing phone companies with entirely different agendas than some of the MCI bondholders.
"Let's keep in mind these trade creditors are other phone companies that want to put every roadblock they can in the way of bringing this company back healthier," says Jefferies & Co. analyst Richard Klugman.