Adelphia firms on buzz of Rigas deal; Berkshire surprises with overnighter

By Ronda Fears

Nashville, Tenn., May 22 - As stocks leveled off players were creeping back into the market, with some selective buying in biotech and selling in software. Adelphia also firmed as buyers emerged on reports that the company is close to a deal with the Rigas family and possibly restructuring some $8 billion in debt.

Meanwhile, the primary market was reeling after a whirlwind overnighter from Berkshire Hathaway Inc. with the first negative coupon deal, which was seen as a major coup for the revered CEO Warren Buffett and a vote of confidence in the convertible market from the "Oracle of Omaha."

In general, it was a cat-and-mouse game for convertible investors, however, as stocks were lower for most of the session before a late-day buying spree helped the Nasdaq and Dow Jones Industrial Average each eke out 0.5% gains.

"The overall mood this morning was wait and see," said the head trader at a major investment bank in New York.

"It was what I would call a whipsaw trading day with the bulls and bears trying to feel each other out, sort of a cat-and-mouse game. At the end of the day, I thing there was a lot of chasing going on."

Biotechs were beginning to see buyers emerge strongly late in the session, traders said, noting movements in Amgen, ImClone and King Pharmaceuticals.

Adelphia was a major focal point throughout the day, however, as reports of a deal with the founding Rigas family to relinquish control and assets hit the tape.

There was a Wall Street Journal story that said the company and the Rigases were close to signing an agreement for the family to reduce its control of the cable company and transfer assets to help offset the $2.3 billion the Rigas family borrowed from the company last year. Reuters was reporting that Adelphia was close to a deal with lenders to restructure about $8 billion of debt and open new lines of credit, contingent on the founding Rigas family ceding some control of the company.

Adelphia's convertibles firmed nicely on the news, traders said.

The 3.25% convertible, which is putable at par in a year, was quoted at 52 bid, 54 offered, up from 43 bid on Monday. The 6% convertible was quoted at 39.5 bid, up from bids ranging from 40 to 48 on Monday. Adelphia shares are still hanging at $5.70, as the Nasdaq has not yet made a decision about whether to delist the stock.

"They're moving up because of the deal with the Rigases," said a dealer.

"There are still some believers in this story, and if you believe then this is a good place to buy at."

A hedge fund manager in New York said recovery rates are too low given the assets that Adelphia has put up for sale. The company is selling about half its cable assets - some in the coveted Southern California area.

"I think there could be recovery rates in the 70s for those bonds," said the New York hedge fund manager.

"There are a lot of LBO types out there flush with cash. There may be more interest out there than people think."

Much of the market's attention Wednesday was captured by the Berkshire deal with a negative 0.75% coupon in a new structure dubbed "SQUARZ."

It was oversubscribed several times, according to market sources, but was not seen trading much during the session and quoted closing at issue price with the offer at 0.25 point over issue price.

"It's probably sitting in a few sturdy hands - the likely buyers being the insurance funds, retirement funds," said a convertible trader at a hedge fund in New Jersey.

"We didn't see it trading at all. I can't find it anywhere."

A convertible trader at another hedge fund in New Jersey said lots of hedge funds were not interested in the deal because volatility is so low on the underlying Berkshire stock.

"I couldn't make it work," the trader said.

"They had an hour-long conference call to explain the structure and how it would work. Then, they launch it with a stock that it won't work with."

The market is hungry for new paper, however, and the deal sold very well, getting upsized from $250 million to $400 million, as two other new deals totaling $480 million were priced from Toys R Us and Charming Shoppes.

Toys R Us sold $350 million of 6.25% mandatories at the aggressive end of guidance. The issue closed up 1.25 points from par of 50 as the underlying stock lost 7c to $17.68.

Charming Shoppes sold $130 million of vanilla convertible notes to yield 4.75%, pricing at the rich end of revised yield talk that put the coupon at 4.75% and premium between 25% and 30%. Original guidance put the yield at 5.0% to 5.5% and premium between 23% and 27%.

The Charming Shoppes deal also was advanced to price a day early, as the market had widely anticipated.

In the immediate aftermarket, the new Charming Shoppes deal was up 1.25 points from par with the offer at 102.75. The underlying shares ended down 21.44c to $7.4456.

Market sources are still looking for new deal flow to pick up in the next few weeks, particularly after the Memorial Day weekend.

In addition to retail names, market sources are expecting several more mandatory convertibles from the utility sector.

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