Dust after the Telecom Thud

Financial irregularities, accounting scandals, bankruptcy, the words changed
but the meaning behind them remained the same.

During the first-half of the year 2002, the telecom industry heard them all.
The year started with Global Crossing filing for bankruptcy in January, followed
by FLAG Telecom in April, followed by Qwest Communications, and now the much
talked about WorldCom.

Global Crossing, the worldwide voice and data carrier for telecom companies,
filed for Chapter 11 bankruptcy in January 2002, as the company inflated pro
forma values for cash revenue and adjusted EBITDA, by including amounts for
which cash was not received or where there had been non-monetary exchanges of
capacity. In April 2002, Bermuda-based FLAG Telecom filed a voluntary petition
under Chapter 11 due to the acceleration of the bank debt of FLAG Atlantic Ltd
by the syndicate of banks which were its lenders, which constituted a
cross-default under the company’s indenture for its outstanding senior notes.
Certain subsidiaries of the company also filed voluntary petitions under Chapter
11. Qwest improperly accounted for about $1,16 billion in sales of optical
capacity on its network, as well as sales of communications equipment.

Continuing the trend, WorldCom, the world’s largest carrier of Internet
traffic and the second largest US telephone and data services company, has filed
for bankruptcy.

This is the latest in a stunning series of corporate collapses and the
biggest bankruptcy in the US history.

Officials at WorldCom Inc shifted accounts as early as 2000, well before the
nearly $4 billion in accounting irregularities that led the government to file
civil fraud charges against the company. With more than $100-billion in assets
reported at the end of March, and debts of $41 billion, WorldCom bankruptcy
would be twice as large as Enron’s record-setting filing and four times as big
as Global Crossings.

With the threat of Chapter 11 bankruptcy, WorldCom aimed to secure a
debtor-in-possession (DIP) funding agreement from Citigroup, JP Morgan Chase and
General Electric’s GE Capital financing arm. The money would allow WorldCom to
maintain its networks, serve customers, and pay employees during the protracted
bankruptcy process.

Despite all downs, WorldCom hopes to recover in a period of 12 months and has
hired a special restructuring team for this purpose. But it seems very difficult
for the company when the economy is in bad shape.

Recently, it was in news that WorldCom had reached agreements to transfer
nearly two million wireless phone customers to other service providers like
AT&T Wireless Services, Verizon Wireless, Alltel, etc, as it prepares to
close its money-losing wireless unit by the end of September 2002. AT&T
Wireless would get about 600,000 WorldCom customers.

But due to the telecom giant turning bankrupt, the long-distance sector in
the US, which has been building throughout the late 1990s, has lost much of its
value.

Will WorldCom woes have any effect on the services front? Well, mentors
believe consumers and businesses will not see disruptions in services as a
result of WorldCom’s accounting scandal, but have pointed out that the
quality-of-service may deteriorate over time.

The WorldCom pain has affected India too, leading to VSNL’s woes.

In the Indian context, VSNL, the country’s biggest international phone
service provider, is the worst affected, with WorldCom filing for bankruptcy.
According to VSNL’s Annual Report 2001-02, the total amount of outstanding
dues is Rs 561.2 crore. Out of this, VSNL has managed to recover a substantial
amount of Rs 300 crore, as per the newspaper reports.

VSNL is however, quite optimistic and is closely monitoring the situation.
VSNL will take all the necessary steps in order to recover its dues, including
seeking to be on WorldCom’s Creditors’ Committee, and identification of VSNL
as a critical vendor with the consent of WorldCom, in order to ensure that it
receives the money due to it.

Will VSNL’s optimism pay off?

A more important question that has not been duly answered so far is: with
WorldCom filing for bankruptcy, should other ILD operators look at alternative
routes? Clearly, even if the operators decide to take that path, they will need
to be cautious enough and have a very stringent policy signed with those
carriers who provide financial security to the company.

Nishu Rastogi