NEW YORK (CNN/Money) -
A New York judge rejected an attempt by WorldCom banks to recover the $2.65 billion they are owed, escalating the chances that the troubled telecom will file for bankruptcy, persons familiar with the situation told CNN/Money Friday.
Twenty-five of WorldCom's 30 banks signed onto a motion to seek a restraining order against WorldCom that would freeze the $2.65 billion, the sources said.
The banks claimed in the motion that WorldCom, which drew down on a $2.65 billion credit facility in May, provided misleading financial information, the persons said. But a New York State Supreme Court judge rebuffed the banks' attempts late Friday. A hearing is set for next week on the issue, persons said.
Citigroup was not part of the banks that filed the lawsuit and has resigned from the steering committee, a person said.
The news comes as WorldCom is struggling to survive a $3.8 billion accounting scandal. WorldCom CEO John Sidgmore told the Wall Street Journal earlier this week that bankruptcy is looking more difficult to avoid. A WorldCom (WCOME: Research, Estimates) bankruptcy would be the largest in U.S. corporate history and even outrank that of Enron Corp.
"Bankruptcy is highly likely now," a different person said Friday.
As WorldCom's fortunes decline, the banks had little choice in seeking the restraining order. WorldCom has about $30 billion in debt and earlier this week said it won't pay a dividend to MCI Group shareholders, which will save it $70 million. The company is also laying off 17,000 employees.
"We could either try to get the money back now or let them spend it," a person said.
WorldCom lenders are only willing to consider providing capital if they can get the loan secured either through bankruptcy or with WorldCom assets, banking sources have said.
The troubled company has been trying to find a way to avoid bankruptcy and has held talks with GE Capital, the financing arm of General Electric, for a debtor-in-possession loan, bank sources have told CNN/Money.
Bank of America and WorldCom could not be reached for comment. Deutsche Bank declined comment. Citigroup declined comment.