Adelphia heard higher, even as bankruptcy beckons; Asbury Auto sells upsized deal

By Paul Deckelman and Paul A. Harris

New York, May 31 - Adelphia Communications Corp. debt was being quoted mostly higher Friday, even as the troubled No. 6 U.S. cable systems operator seemed to slide ever closer to a bankruptcy filing, with a big chunk of convertible debt becoming putable back to the company and would-be asset buyer Charter Communications heard to have walked away from the negotiating table.

In the primary market, players were cheered by a positive junk bond mutual funds-flow number, which scotched fears that liquidity might be starting to ebb from the market. Meantime, Asbury Automotive Group Inc. went into high gear and sold an upsized offering of 10-year notes inside of pre-deal market price talk.

Adelphia investors were greeted with the sobering news that the Nasdaq equity market had officially delisted the company's shares, effective on Monday morning, due to its failure to file its 2001 annual report by the extended Thursday deadline. That delisting, in turn, means Adelphia has to offer to buy back $1.4 billion of its convertible debt - its 6% convertible notes due 2006 and 3¼% converts due 2021 - and the company also formally acknowledged that the failure to deliver the financial report had resulted in events of default under the credit facilities of some of its subsidiaries, with those lenders also in a position to demand repayment, although so far, the banks seem to be holding off.

There were also reports by CNBC and other news agencies that Adelphia's talks with Charter Communications to sell the latter some valuable assets for more than $3 billion - Adelphia's Los Angeles-area operations were seen as the most likely candidate - had ended. The reports quoted people close to the talks as saying that St. Louis-based Charter had balked at paying Adelphia the approximately $3,600 per subscriber which the latter was asking.

If in fact Charter is out of the picture, it would seem to put the kibosh on Adelphia's chances of coming up with a lot of cash fairly quickly to stave off its looming convertible redemption obligations and other problems, including the need to make good on $45 million of missed interest payments by June 15 to avoid defaulting on several of its bond issues.

"Given the timeframe Adelphia is working with, it sounds like that's probably a pretty critical problem for them, especially if the way you structure this is an asset sale or a collateralized loan against assets," said high yield analyst Ron Gies of Stone & Youngberg LLC in San Francisco. If Charter is out, "there aren't a lot of people that can write those $2 or $3 billion checks on 48 hours notice, so you need somebody who is in the process already. It would seem that if CHTR walks away, anybody who is not already in the process is not likely to just step in."

Even so, what Adelphia needs is a deus ex machina rescue. "They need to find a fresh source of capital in the next 48 hours," said Gies. "A fresh source of capital, whether it is the result of an asset sale or a collateralized loan against certain assets, or however they structure it, would certainly do a lot to [mollify] the banks, and it would certainly argue to the convertible holders that although they have the right to put the bonds back to the company, they might choose not to. That's certainly what they have to focus on. If there is not a source of capital outside the existing bank group, then all of these things will seem to fall at the same time - and that's Monday morning, presumably."

But even as Adelphia's chances to stay out of the bankruptcy courts seemed to be narrowing before investors' eyes, they were taking the bonds higher, traders said - perhaps even because bankruptcy now seems like a more likely outcome.

"In a weird way, it actually works to make people a little more aggressive" about buying Adelphia's bonds in the face of bad news, opined a distressed-debt trader who saw the bonds "better, although not on a lot of activity," given the generally quiet state of the market Friday. He quoted Adelphia's 10 7/8% notes as having firmed to 74.5 bid/75 offered from 72 bid Thursday.

"People feel like there's a better shot that they are going to go bankrupt. It gives you a higher comfort level that there will be a one- to-two-year workout. Guys feel pretty comfortable with the valuations. You can get yourself into the high 70s if you're looking for a 25%-30% rate of return over a two-year period of time, which I'm pretty sure is the way it's going to work."

The alternative to restructuring the currently asset-rich company in a coherent fashion, he said "is to have them sort of hanging out, selling off their better assets, and struggling just to stay alive makes it a lot more of an iffy situation for our guys."

He said that "the reaction we saw [Friday] is a reaction to the fact that, obviously, there are people on the board arguing against doing any kind of a quick sale, and arguing rationally for an orderly straightening-out of affairs." He said that this could take place either outside of court or through a bankruptcy filing (he thinks Chapter 11 is a more likely scenario), "but either way, that's better for bondholders" than a panicky firesale of the best assets.

That was also, in effect, the contention of a sizable Adelphia shareholder, Highfields Capital Management LP, a Boston-based investment firm that holds 6.5% of the Coudersport, Pa.-based cabler's shares. It said in a letter to Adelphia's interim chief executive officer, Erland Kailbourne, and a filing with the Securities and Exchange Commission, that the whole company should be put up for sale; a piecemeal sale of assets, it argued, would be "a shortsighted mistake that will result in the satisfaction of near-term liabilities at the expense of all other creditors and shareholders alike."

Highfields thus finds itself aligned with newly appointed director and 12% Adelphia shareholder Leonard Tow, who controls two seats on the company's nine member board, and who wrote to Kailbourne asking that no hasty action be taken, at least not before Saturday's scheduled board meeting. Kailbourne, in response, expressed surprise at Tow's opposition to possible asset sales, but said no decisions would be made before Saturday.

Another trader also saw Adelphia bonds up despite the seeming bad news, quoting the 10 7/8s at 75.5 bid/76.5 offered, well up from prior levels in the 70 area. Investors feel "there's real value there," he said, even if the company might have to restructure.

At another desk, Adelphia paper was "up a little, anywhere from two to three points." Adelphia's 9 7/8% notes due 2007 were quoted more than a point better at 73.5 bid, while the 8 7/8% notes due 2007 of Adelphia's Arahova Communications Inc. were heard a point better, at 72 bid.

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