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.

Elsewhere, a trader said the bonds of Venture Holdings Corp., a Fraser, Mich.-based maker of plastic interior and exterior components for the automotive industry, were sharply lower in brisk dealings Friday, citing unconfirmed market rumors that its German unit might be headed for bankruptcy. He quoted the company's 12% notes due 2009 as having fallen to the 78-80 bid area from recent levels around 92, while its 9½% notes due 2005 had dipped to 80 bid from 93 previously.

"People are scared to death about the coupon payment," he asserted, with the company's 12% notes and its 11% notes due 2007 having a June 1 coupon payment date, while the coupon on the 9½% notes comes due for a payment in July.

A market observer also saw the Venture bonds swoon, calling them "down substantially" on the same market buzz that a European subsidiary might have to file.

He saw the 12s down five points, to around the 75 level, with the 9½% notes off 10 points on the session, at 80, and the 11% notes eight points lower, at 82 bid.

The trader also said that AT&T Canada bonds "were all over, across the board," its 7.65% bellwether issue swinging between an early low of 12 and a high of 15 late in the session on "all kinds of rumors." The bonds, he said, had recently been trading as high as 17-18, but "got hammered" Thursday, before heading back up Friday.

The Canadian telecommer's 31% owner, AT&T Corp., announced plans Friday to raise $2.25 billion via a stock sale and said it would use proceeds towards its pledge to buy the 69% of AT&T Canada it doesn't already own. Still unclear, however, was how this would help the company's bondholders, since Ma Bell has long been on record as saying that it was not under any obligation to pick up its Canadian offspring's debt as well.

Elsewhere on the telecom front, a trader said WorldCom Inc. Bonds were "volatile," and quoted the Clinton, Miss.-based long-distance giant's benchmark 7½% notes due 2011 as having climbed to 49 bid/50 offered from prior levels around 46.5 bid/47.5 offered. He saw Nortel Networks' 6 1/8% notes due 2006 up a point at 68.5 bid/69 offered, while a market-watcher saw Qwest Communications International Inc.'s bonds a point better across the board.

A trader said that steel bonds seemed to have popped up, with Bethlehem Steel's 10 3/8% bonds rising to 13 bid from 11 and Bethlehem subsidiary Lukens Steel's 7 5/8% paper up two points to 11. Weirton Steel's bonds were in the mid 40s, "up a bit," he said. He cited a Wall Street Journal article which pointed out that since the White House announced a package of protectionist tariffs on some foreign steelmakers, steel prices had spiked up and shortages in some types of steel were being seen, just the tonic needed by the beleaguered American steel industry, which has seen many of its companies - even including the giant Bethlehem - slide into bankruptcy in the past several years, due to a supply glut and anemic prices. The steel bonds, he said "had a good run" in response to the better market conditions outlined in the Journal, although he qualified that by noting that trading had been light.

At another desk, U.S. Steel LLC's 10¾% notes due 2008 were quoted up more than a point at 106, while AK Steel Corp.'s 9% notes hovered at 102.5 and its 8 7/8% notes hung in at 97 bid.

CMS Energy Corp, whose bonds had recently strengthened on the news that the Dearborn, Mich.-based power producer and energy trader would shed its oil and gas exploration and production unit, and on the measures the company was taking to get on top of the budding sham power trading scandal, was quoted down about a point-and-a-half to two points Friday, its 7½% notes quoted at 92.5 bid/94.5 offered, its 7 5/8% notes at 95.5 bid/97.5 offered, its 8½% notes at 95.5 bid/97.5 offered, and its 9 7/8% notes at par bid/101 offered.

The company's bonds, formerly trading at or near par, fell into 80s on the news that CMS and several other industry players had engaged in bogus "round-trip" power trades that did nothing but artificially inflate trading volume statistics. That led to the resignation of a pair of key CMS executives, including chairman William McCormick, a restatement of earnings to eliminate the bogus trades, and the naming of an independent investigatory panel, whose membership was announced Friday. The corrective measures and the asset-sale news had boosted the bonds back into the 90s.

The high yield primary market awoke Friday to AMG Data Services' report that $205 million had flowed into high-yield mutual funds, according to people watching the figures. That suggested the $479.7 million the outflow the previous week after a long run of inflows was a one-off, albeit a substantial one.

When Prospect News pressed one primary market source for a reaction to the $205 million inflow, the reaction was "inflow, schminflow."

"Who knows what's going on?" this official asked rhetorically. "It could be that this inflow, after last week's outflow, just means that there is some re-jigging going on. In this market it could be a myriad of things.

"All I know is that I don't expect substantial amounts of cash to flow out of high yield. Where else are you going to park your cash?"

Some investors on Friday parked cash in Asbury Automotive Group, Inc.'s upsized junk bond deal. Its 10-year senior subordinated notes (B3/B) were upsized to $250 million from $200 million and priced at par to yield 9%, inside the 9 1/8%-9 3/8% price talk. Goldman Sachs & Co. was bookrunner.

Conceding that Asbury turned out to be "a good print," one syndicate official said that the intense demand for the paper had been something of a surprise, albeit a pleasant one. The company's chief marketing officer Allen Levenson said that investors seemed more impressed with the company's business model than with the auto retailer's new joint venture with Wal-Mart (see related story in this issue).

In secondary activity, Asbury Automotive's new bonds traded around 100.5 bid, up a bit from its par issue price. A trader said the new issue had "priced rather tight" for a B3/B deal, at 397 basis points over the comparable Treasury issue, "pretty snug for a single-B in most cases - almost like a spread bond - but the retail auto market [industry] was well liked, because they traded up to par-and-a-half."

Asbury was the only one of the two deals scheduled for Friday that priced.

A $275 million offering from H&E Equipment Services, Inc. appeared to have headed in the opposite direction to Asbury. It was downsized, retooled and placed back on the calendar as Monday's business.

From $275 million of 10-year senior secured notes (B3/B), H&E is now looking at only $200 million of the 10-year senior notes, according to a syndicate source. The company added a $50 million senior subordinated mezzanine tranche. No modifications to the 11% area price talk were heard. And the deal is expected to price Monday afternoon.

Also on Friday three new deals sprouted onto the forward calendar. The market heard of new business from Advanced Medical Optics, Inc., Kronos International and Methanex Corp. Meanwhile more details were heard on the junk bond offering from Graham Packaging.

The market learned that the Orange County, Calif.-based optical-care and equipment company Advanced Medical Optics is eyeing a Tuesday roadshow start for its $175 million of eight-year senior subordinated notes (expected ratings B3/B), via joint bookrunners Merrill Lynch and Banc of America Securities.

Kronos International, a subsidiary of NL Industries which announced the deal well after the market close on Thursday, will start the European roadshow June 10 for its €175 million of Rule 144A-elligible senior secured notes, via a syndicate that appears to include Deutsche Bank Securities.

And late Friday Vancouver, B.C.-methane producer Methanex made public its filing with the British Columbia Securities Commission that it intends to bring US$200 million of 10-year senior notes, via bookrunner Goldman Sachs. A syndicate source advised that the market would have to wait until Monday for more details. However, the source allowed, timing on the Methanex deal is "very near-term."

One deal that has been parked on the Prospect News forward calendar's "on the horizon" area took on a bit more form Friday. Graham Packaging Company, LP and its GPC Capital Corp. I subsidiary announced that they will bring $100 million senior subordinated notes due January 2008 via joint bookrunners Deutsche Bank Securities and Salomon Smith Barney, sometime in July.

And price talk of 10¾% area was heard Friday on Wyndham International, Inc.'s $750 million of six-year senior secured notes (Caa1/B-), which are expected to price Tuesday via joint bookrunners JP Morgan and Bear Stearns.

Wyndham and H&E Equipment take their places among seven deals poised to price during the week of June 3, for a total of $1.67 billion.

The others include Transdigm Inc.'s $75 million add-on (B3/B-) via Deutsche Bank and Credit Suisse First Boston, Transportation Ferroviaria Mexicana SA de CV's $170 million (B1/BB-) via Salomon Smith Barney, Kansas City Southern Railway Corp.'s $150 million (existing: Ba2/BB-) via Morgan Stanley, IES Corp. $150 million's (B3/B-) from Credit Suisse First Boston and Salomon Smith Barney, and Intermet Corp.'s $175 million (B+) via Deutsche Bank Securities and Banc of America Securities.

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