NEW YORK (CNN/Money) -
WorldCom Inc. missed a key interest payment this week and the telecommunications company, mired in a $3.8 billion accounting scandal, faces a critical court hearing Wednesday that could push it into bankruptcy.
Clinton, Miss.-based WorldCom (WCOME: Research, Estimates), which is teetering on the verge of bankruptcy, missed three interest payments Monday totaling $79 million, people familiar with the situation said Tuesday. Bondholders now have the right to "accelerate," or demand payment of their principal, after a 30-day grace period, these people said.
As it starts to run low on cash, about two dozen banks are seeking a court order to freeze a $2.5 billion loan that WorldCom took out in May, court papers showed. Last Friday, a New York judge denied the lenders' request for a temporary restraining order to freeze the money.
The banks, led by Deutsche Bank, contend that WorldCom fraudulently obtained the loan since its accounting errors masked its financial condition. Late last month WorldCom said it had booked $3.8 billion in expenses incorrectly, inflating its pretax earnings.
WorldCom persuaded a judge Tuesday to move the case to Federal Court in New York. A court hearing is now set for Wednesday morning before U.S. District Judge Jed Rakoff.
Meanwhile, WorldCom has arranged $2 billion in so-called debtor-in-possession financing with J.P. Morgan, Citigroup and GE Capital that would allow it to operate while in bankruptcy. If Judge Rakoff rules in favor of WorldCom's lenders on Wednesday, WorldCom will probably be forced to seek bankruptcy protection, a move that could come as soon as this week, banking sources told CNN/Money.
In this situation, the $2 billion bankruptcy loan would be ready for WorldCom should it seek Chapter 11 protection, one person familiar with the situation said. A WorldCom bankruptcy would be one of the biggest in U.S. history, following that of Enron Corp., which filed for protection from creditors under Chapter 11 last December.
In Chapter 11, a company is protected from creditors while it tries to reorganize and pay off its debts.
A WorldCom spokeswoman declined to comment on the lawsuit or a possible bankruptcy filing. CEO John Sidgmore told the Wall Street Journal last week that bankruptcy is looking more difficult to avoid.
If Rakoff rules in WorldCom's favor, then some other form of financing, likely through the same lenders, will be made available if WorldCom chooses not to seek bankruptcy protection, though WorldCom would probably need to use its assets to secure such a loan, one person said.
WorldCom, saddled with about $30 billion in debt, may still opt for bankruptcy even if the court sides with it. Chances of a Chapter 11 filing "are good," this person said. Last week, WorldCom said it would not pay a dividend to MCI Group shareholders, which will save it $70 million. The company is also laying off 17,000 employees.
J.P. Morgan and Citigroup are not among the banks suing WorldCom. GE Capital has not been one of the company's lenders.
Pension funds sue WorldCom
Separately, three California pension funds sued WorldCom, seeking to recover about $318 million. The lawsuit, filed on behalf of the California Public Employees' Retirement Systems (CalPers), the California State Teachers' Retirement System (CalSTRS) and the Los Angeles Country Employees Retirement Association (LACERA), also names WorldCom executives and its banks as defendants.
"Our suit charges that the company clearly knew -- and the banks clearly had reason to know -- that the WorldCom books falsely portrayed the company's true financial picture," CalPers CEO James Burton said. "These banks underwrote the bonds so that WorldCom could use the monies raised to avoid having to rely on these same banks' outstanding credit line."
CalPers is trying to recover $268 million, CalSTRS is seeking $24.5 million and LACERA hopes to recover $26 million.
ABN Amro, Deutsche Bank, Citigroup, J.P. Morgan and GE Capital all declined to comment. Banc of America could not be reached for comment.