Adelphia, Tyco bonds fall as companies' situations worsen; IESI sells $150 million notes

By Paul Deckelman and Paul A. Harris

New York, June 7 - Adelphia Communications Corp.'s bonds were eroding on Friday, traders said, as the embattled cable television operator edged closer to what is now being seen as an almost inevitable bankruptcy filing and as fresh questions arose about the company's bookkeeping tactics. Meantime, the bonds of another company under investigation - Tyco International Inc. - were knocked downward on news that it might have to delay a badly-needed equity offering, and by twin downgrades by the major credit ratings agency that brought the bonds to just a notch away from junk status.

Friday opened in the high yield primary market with news that a relatively modest $62.9 million had flowed into the high yield mutual funds for the week ending June 5, according to people who watch the figures compiled by AMG Data Services.

However the forward calendar continued to build, with new offerings from Extendicare Health Services, Marietta Corp. and Mariner Health Care, and two new emerging markets corporate offerings -Copamex and Corporacion Durango.

And the curtain came down on two deals, Friday. Texas waste hauler IESI had a happy ending, pricing its junk bonds in the middle of talk. However, Wyndham International walked away with empty hands from what turned out to be something of a high-yield epic.

Wyndham circulated a press release early Friday morning stating that it would not complete its downsized, restructured transaction.

Initially expected to price during the week of May 27, Wyndham was downsized on June 5 to $500 million from $750 million, its talk widened to 11% from the 10¾% area, and its call lockout lengthened to four years from three years, according to syndicate sources.

Wyndham International chairman and CEO Fred J. Kleisner stated in the Friday release: "We found the market conditions not deep enough to issue the notes on terms that made sense to the Company and its shareholders," and added that since Wyndham does not have any bank debt maturities until June 30, 2004 it would thus evaluate the market at a later time.

A syndicate official told Prospect News that Wyndham had come with price talk that was perhaps "too rich," and that once it widened the talk investors knew that they had the company over a barrel, and pressed for further concessions such as covenant changes.

"The deal wasn't there at a level the company was willing to take," the syndicate official commented Friday, shortly after the curtain fell on Wyndham.

JP Morgan and Bear Stearns were the joint bookrunners on the postponed deal.

On another stage in the primary market, the junk bond deal from Haltom, Tex. waste hauler IESI Corp., $150 million of 10-year senior notes (B3/B-), priced at par to yield 10¼%. That was in the middle of the 10¼% area price talk. Credit Suisse First Boston and Salomon Smith Barney were joint bookrunners.

As IESI and Wyndham took their leave, five new credits danced onto the forward calendar Friday, bringing the total of dollar-denominated, straight-up high yield deals to $5.215 billion.

Two nursing home credits appeared with Rule 144A deals Friday.

Extendicare Health Services, Inc., a wholly owned subsidiary of Markham, Ont.-based Extendicare, Inc., will start roadshowing $150 million of new eight-year senior notes (B2/B-) on Tuesday, according to a market source who identified Lehman Brothers as the bookrunner. Other syndicate members are likely to be announced. And Atlanta, Ga.-based Mariner Health Care, Inc. will also start its roadshow Tuesday for $150 million of eight-year senior subordinated notes via joint bookrunners Goldman Sachs and UBS Warburg.

New business was also announced Friday from Marietta Corp., which will bring $75 million seven-year senior secured notes (B3/B-).

Marietta intends using the proceeds to fund the acquisition of Morton's Restaurant Group. In the company's recent filings with the Securities and Exchange Commission Marietta disclosed that it is currently planning to solicit proxies to oppose the sale transaction between Morton's and an affiliate of John Castle, which was approved by Morton's board of directors.

The filing further disclosed an offer by Carl Icahn, but not yet approved or rejected by the Morton's board, to acquire Morton's.

"The company has not yet publicly responded to the Icahn offer," the filing stated. "Although we believe, based upon the publicly available information about both offers, that the Icahn offer is better for the stockholders than (the Castle) Offer, neither offer is adequate."

The filing went on to state that Marietta and its affiliates "are exploring various alternatives with respect to their stockholder position, including raising additional financing for a potential acquisition of Morton's."

Although a syndicate source confirmed that Jefferies was the dealrunner on Marietta, no timing on the deal could be determined by press time.

And as balm for the market in the wake of Wyndham, PCA International, which postponed its $200 million seven-year deal (Caa1/B-) on April 26, was heard to be back in the market, although the details are few. Standard & Poor's assigned PCA International LLC's $160 million senior unsecured notes due 2009 a rating of B-, and added that the notes "are being offered in lieu of a previously planned $200 million issue of seven-year notes." Goldman Sachs ran the PCA deal in April but is not running the rumored new offering, according to an informed source.

The news of business rumored or announced Friday does not end there, however. Two emerging markets credits also took their places on the forward calendar in the wake of last Thursday's "blow out" pricing by Mexican railroad TFM. In a deal increased by $10 million and said to be five time oversubscribed, TFM sold $180 million of 10-year senior notes (B1/BB-) to yield 12¾% via Salomon Smith Barney.

That investment bank will also run the books on Copamex SA de CV's offering of $200 million of seven-year senior notes (expected ratings B2/BB-), which starts roadshowing on Monday.

Morgan Stanley, meanwhile, is the bookrunner on Corporacion Durango's $175 million of seven-year senior notes (B3/B+). The Durango, Mexico-based integrated paper producer's bullets hit the road Tuesday.

Nine straight-up dollar-denominated high yield deals totaling $2.35 billion are expected to price during the week of June 10 along with a £150 million sterling deal.

And some high yield investors will reportedly be eyeing $500 million of five-B paper, as Methanex Corp. brings US$200 million of 10-year senior notes (Ba1/BBB) via Goldman Sachs and Kennametal, Inc. plans to transact $300 million of 10-year senior notes (Ba1/BBB) via joint bookrunners Goldman Sachs and JP Morgan.

As Wyndham struggled late in the week of June 3 one source from the buy-side commented that a similar fate might befall any number of the junk bond deals now positioned on the forward calendar, many if not all of which some observers anticipate will be hit the block by the time the market breaks for Independence Day, three weeks and a few days hence.

A sell-sider, presented with this color from the other side of the fence, allowed that some of the deals ("one or two, maybe three") could indeed share Wyndham's fate.

"It's pretty packed," this investment banker said. "There's no question about that."

In the secondary, Adelphia "was all the news today," a trader asserted, "and basically, they got crushed," while another agreed that "apart from Adelphia, not much was going on."

The second trader quoted the faltering Coudersport, Pa.-based No. 6 U.S. cabler's senior bonds - which had been hanging in around the mid-70s for most of the week - as having opened around 70 bid, then having swooned as low as 56 bid/58 offered during the session, before bouncing off those extreme lows to end in the lower 60s.

"It was ugly," a trader said, quoting the company's 9¼% notes that are scheduled to come due later this year as being offered at 62. He saw Adelphia's issues down about 10 to 15 points on the day.

At another desk, Adelphia's 10 7/8% notes due 2010 were seen as having fallen to 62 bid from 74 late Thursday, while its 10¼% notes due 2011 ended at 63 bid, down from 75.5. The 8 7/8% bonds due 2007 of Arahova Communications Inc. - the former Century Communications, bought by the then-high-flying Adelphia two years ago - went down to 58 bid from 64 previously. The differential between Century's bonds and parent Adelphia's is attributable to concerns raised earlier in the week by Moody's Investors Service when it downgraded Adelphia's ratings and those of its subsidiaries, remarking that the Century bondholders would likely recover far less than the holders of the Adelphia debt in the event of a restructuring scenario.

Adelphia shares - which were delisted this past Monday by the Nasdaq for failure to make timely financial reports and which have been trading via the pink sheets ever since - fell 36 cents (54.55%) on Friday, to close at 30 cents, on substantial volume of 46 million shares.

Adelphia's long-suffering investors, already rocked by ever- worsening disclosures of massive off-balance-sheet debt obligations stemming from alleged self-dealing transactions initiated by the Rigas family, which formerly controlled Adelphia, got a nasty new shock Friday, as The Wall Street Journal reported that Adelphia had inflated the number of its cable-TV subscribers by between 400,000 and 500,000, or as much as 10% of its total subscriber base. The paper, quoting people familiar with Adelphia's situation , said the company kept two sets of books for its capital expenditures, one, with the real numbers, for its own internal use, and the other, with the allegedly bloated subscriber figures, which were shown to Wall Street with the apparent intent of impressing investors.

"The disclosures suggest that Adelphia's questionable accounting practices may be far broader than originally believed and are likely to raise new questions about the company's core business as it tries to raise cash to stave off bankruptcy," the WSJ said.

Adelphia's options for avoiding bankruptcy appeared to be dwindling, Friday, even as $1.4 billion of convertible debt remained immediately putable to the company and even as it faced a looming June 15 deadline for making good on between $45 million and $50 million of missed May 15 bond interest payments. Bloomberg News reported after the financial markets had closed Friday that Charter Communications Inc., which had reportedly been in talks to purchase cable assets from Adelphia, said that it had ended those talks, saying it could not come to an agreement with Adelphia which would be beneficial to Charter's shareholders within the narrow time frame that such talks were taking place.

Charter thus confirmed reports about a week earlier that those talks on Adelphia's possible sale of its Los Angeles-area cable operations and other assets for as much as $4 billion had ended, after the two companies were unable to bridge the gap between Adelphia's reported asking price of $3,600 per cable subscriber and Charter's reported top offer of $2,700 per subscriber. Charter had been the only potential buyer reported to be in serious talks with Adelphia, and its shares and bonds had moved lower as a result, on investor concern that the St. Louis-based cabler, controlled by billionaire Paul Allen, would have to take on new debt to buy the Adelphia assets.

On Friday, Charter's bonds were down at least four or five points on the session, with a trader remarking that Adelphia's continually mounting troubles "certainly had an impact on some of the other names in the sector." Charter's 8 5/8% notes due 2009 were quoted at 82 bid, down from 86.75 on Thursday, while its 9.92% notes due 2011 drooped to 61 bid from 67 previously.

Elsewhere in the communications sector, the bonds of AirGate PCS Inc., which had declined dramatically on Thursday after the Atlanta-based Sprint PCS affiliate sharply reduced its net new-subscriber addition numbers for the current quarter, were not seen having deteriorated any further; AirGate's zero-coupon/13½% notes due 2009 held steady around 42 bid, down at least 15 points on the week. Other PCS operators, such as Alamosa, Triton, U.S. Unwired and Horizon PCS, were likewise seen unchanged Friday from Thursday's sharply lower levels.

And WorldCom Inc. bonds, which had risen earlier in the week on signs that the troubled Clinton, Miss.-based long-distance operator might be making progress in lining up bank support for its proposed new $5 billion credit facility, were seen virtually unchanged Friday, its benchmark 7½% senior notes due 2011 holding steady around 51 bid.

But bonds of a rival long-distance giant - the nominally still investment grade paper of Sprint Corp. - was markedly down on Friday, after Moody's cut its ratings on $22 billion of debt, lowering Sprint's senior unsecured debt rating to Baa3, the last stop before a credit moves down into junkbondland.

Moody' s said the downgrade reflects its view that "1) Sprint will not generate material free cash flow as a percentage of total debt until 2004; 2) Sprint PCS, while growing, will continue to require heavy capital spending; 3) the company's long distance segment, GMG, is struggling to turn around in a difficult competitive environment, [and] 4) liquidity remains a possible concern until the company successfully completes a new bank facility that provides capacity for maturing debt and cash usage of the business, adjusted for the possible sale of the company's directory business."

Sprint's 8 3/8% notes due 2012 were heard to have widened out by as much as 30 basis points on the session, to bid levels of around 375 basis points over the comparable Treasury issue. In dollar-equivalent terms, that would represent a fall from around 99.25 bid to about 97.5. Sprint's debt is rated BBB+ by Standard & Poor's, and its issues still remain generally quoted on spread-versus-Treasuries terms and traded off high-grade desks rather than high yield.

XO Communications bonds continued to languish in the low single-digits, even as would-be buyers Forstmann, Little & Company and Telefonos de Mexico tried to walk away from their prior commitment to buy the deeply distressed Reston, Va.-based telecom company for a combined total of $800 million. The two prospective buyers said that XO's value had dropped sharply since the arrangement was originally announced back in November, but XO late Friday rejected the attempted pullout, saying, in effect, that a deal is a deal. XO's cash-pay bonds remained at the same five cents on the dollar level they have recently held, while its zero-coupon bonds were quoted unchanged at three cents on a the dollar.

Apart from the communications names, Tyco International "got hit again," one market player said of the second consecutive session of the debt's decline. "It was certainly ugly," another observed, quoting the troubled Bermuda-based conglomerate's 6¾% notes due 2004 dropping to 80 bid from 85.5 on Thursday, while its 6% notes due 2003 "got hammered" down to 81.5 bid from 87 previously. Its 7% notes due 2013 ended down six points, at 67 bid, as did Tyco's 9½% bonds due 2022.

Tyco shares meanwhile plummeted $4.50 (30.82%) in New York Stock Exchange dealings Friday, to $10.10. Volume of some 200 million shares was eight times the normal turnover.

Tyco indicated early Friday that it might not be able to go through with its scheduled initial public offering for its CIT Group financial unit this month, as was previously planned, saying that it was still in talks with the Securities and Exchange Commission aimed at satisfying the SEC's questions.

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