Adelphia falls but reaction muted; upsized Boyd Gaming trades higher in secondary

By Paul A. Harris

St. Louis, Mo., March 27 - Adelphia Communications Corp.'s off-balance sheet debt bombshell Wednesday caused its bonds to trade lower but reaction in the high-yield market seemed varied and muted, in an otherwise quiet market.

Meanwhile, Boyd Gaming Corp. was the biggest event in a busy primary market session which saw four new deals priced.

Boyd Gaming upsized its offering of 10-year senior subordinated notes (B1/B+) by $50 million to $250 million. They priced at par to yield 8¾% via joint bookrunners Deutsche Banc Alex. Brown, Banc of America Securities and CIBC World Markets. That level was in line with price talk which had the yield in the 8¾% area, according to a syndicate source.

One trader told Prospect News that as soon as Boyd's new notes broke in the secondary they were seen trading higher at levels of "par and three quarters to 101 and a quarter.

"They were up right away," the trader said, "although there could have been some flipping, with people not wanting to hold those bonds over the long term."

Also on Wednesday aaiPharma, Inc. priced $175 million eight-year senior subordinated notes (Caa1/B-) via Banc of America Securities. The new paper priced at 99.346 to yield 11 1/8%.

Globe Telecom upsized its 10-year senior secured notes (Ba3/BB) by $25 million to $200 million. It priced the deal at par to yield 9¾%

And news of a drive-by deal from VGR Holding, Inc., a $30 million (face) add-on to its 10% senior secured notes due March 31, 2006 (B3/B), circulated through the market on Wednesday. The deal, via Jefferies & Co., was reported by a syndicate source to have priced Tuesday at 85.2441. Factoring in the commitment fee of 1.7627% of the principal, the yield to maturity was 15¾%.

Of the business transacted thus far in the week of March 25, Margaret Patel, high yield fund manager for Pioneer Investments, told Prospect News she had played Biovail.

Patel said that given the recent significant inflows that have been reported, she would not be surprised to see the forward calendar build substantially during April.

Asked what is conveying that money into the high yield asset class, Patel said: "I think it's very simply what you would expect with short-term interest rates around 2%. Not only are spreads of high yield versus Treasuries above average, they've narrowed substantially in the past year but they're still above average. You would roughly call it, say, 650 versus a little over 500 basis points, over the last 15 years.

"But what's more significant is short rates at 40-year lows - rates we've not seen since the early 1960s. And that, I think, is more important as far as driving the spreads narrower because the penalty to be in short-term risk-free assets is simply too much for a lot of people. And not that the economy looks like it's doing better people are more willing to take a chance in risky assets. So I think that's what's at play."

"The door to issuance has opened up a little wider, so more companies have been able to get through instead of just being very, very selective.

"Yield spreads have been relatively narrow. Deals have been over-subscribed. I think that's been a pretty steady trend."

In the secondary, Adelphia surprised investors when it disclosed in its earning conference call that its does not include $2.4 billion of debt referred to as "co-borrower" obligations on its balance sheet.

Timothy Rigas, chief financial officer of Adelphia, said on the call that the $2.4 billion of "co-borrower" debt had interest coverage of well over one times, and does not include $500 million the company is owed by its former fiber optics telecom subsidiary Adelphia Business Solutions Inc.

In addition to the debt matters, Adelphia's former unit, ABIZ, filed for bankruptcy, and Adelphia blamed ABIZ for its own widened net loss.

One source reported Adelphia's 10¼% bonds falling nine points to 94 from 103 and its 8 7/8% paper down seven points at 91, from 98. He saw the 9 7/8% paper eight points lower at 94, down from 102.

But there were different views on where the debt was.

One trader said he saw Adelphia's 10 7/8% bonds at 102-104, its 9¼% at 101½%-101¾%, and its 11% notes at 101 ½%.

However the trader added: "You get the feeling that people want out of the paper."

Meanwhile Adelphia's shares fell $3.69 to $16.70 with late afternoon buying on weakness mitigating some of the losses.

While the high yield market showed a somewhat muted reaction, there was concern in other sectors of the markets.

Adelphia's net loss in 2001 climbed to $1.71 billion, or $9.73 per share, compared to $602.5 million, or $4.45 per share, for 2000. Adelphia said the increase in the net loss is primarily attributable to a $1.15 billion, or $6.55 per share, impairment write-down related to certain assets of ABIZ.

Jim Brown, vice president of finance at Adelphia, said on the conference call the company's consolidated senior debt to EBITDA ratio was 11.3 times at year-end 2001, excluding the "co-borrower" debt but including that of ABIZ because the unit was not fully spun off until January. Proforma as if the spin-off had taken place by yearend, he said the ratio would be improved to 6.5 times.

Still, the market was very concerned about the debtload and the magnitude of the invisible debt.

"That's an awful lot of debt that's not on the balance sheet," said Merrill Lynch analyst Oren Cohen, on the conference call, adding a question about what security Adelphia provides for that debt, if any.

Rigas sidestepped the question of security for that debt, providing only that the interest was well covered.

"We will try to provide some more clarity and more comfort on that," Rigas said, without elaborating or discussing a time frame.

Rigas and Brown were both, in fact, upbeat about Adelphia's future.

Rigas said revenues and EBITDA are forecast to grow between 12% and 13% this year and the company upped its forecast for digital and data subscriber in 2002 to 775,000 from 700,000.

Otherwise, all sources said the secondary market was extremely quiet Wednesday with the Passover holiday beginning and Easter looming. The Bond Market Association is recommending a 2 p.m. ET close Thursday and a full close Friday.

Another trader noted that NTL's bonds were up two points across the board: the 111/2s at 35, the 11 7/8s at 35, and the 91/2s at 45.

One trader also reported improvement in some steel names, across the board. Oregon Steel traded up to 100½ from 99 5/8.

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