Adelphia convertibles plunge on $2.4 billion off-balance sheet debt

By Ronda Fears

Nashville, Tenn., March 27 - Adelphia Communications Corp. dropped a bombshell on investors Wednesday 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. The stock and convertibles were pounded, but traders said late afternoon buying on the weakness mitigated some of the losses.

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.

"People are reacting to a lack of transparency on the balance sheet," said Salomon Smith Barney convertible analyst Stuart Novick, explaining the drop in the convertibles in response to the news.

"In the grand scheme of things, people are just tired of seeing these types of things."

The Adelphia 6% convertible notes due 2006 fell 7.625 points to 77.375 bid and the 3.25% convertible notes due 2021 lost 4.5 points to 90.5 bid. The 3.25s were faring better, traders said, because there is a put coming up in 13 months.

Adelphia's convertible preferreds were hit hard, particularly the mandatory issues. There were some buyers on the weakness, however, particularly for the 7.5% mandatory convertibles as the 2004 issue closed down 4.625 points to 18.875 and the 2005 issue dropped 5.125 points to 17.5. The 5.5% perpetual convertible preferred was higher before the conference call but closed down 8 points to 82.

Adelphia shares fell $3.69 to $16.70.

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 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.

While there were a few buyers on the weakness, many investors were glad to shed the paper or glad they had already sold.

"We are holding a little of one of the mandatories and we had already took some profits on the 3.25s, but this is just fantastic news," said a convertible trader at a hedge fund in New Jersey.

"They've sold two converts, some stock and a junk bond in the last six months and this should have been in the prospectuses. What are they thinking?"

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.

ABIZ said it filed bankruptcy due to the industry decline and the virtual shutdown of the telecom capital markets. In the bankruptcy filing in New York, ABIZ listed debts of $882.5 million and assets of $222.7 million. Earlier this month, S&P cut its rating on ABIZ to D, indicating default, after the company missed a March 1 interest payment on its 12.25% senior secured notes due 2004.

ABIZ follows the bankruptcies of Global Crossing Ltd. and McLeodUSA Inc. Other telecoms, like Williams Communications Group Inc. and Metromedia Fiber Network Inc., have said they are considering bankruptcy as an option to their heavy debt burdens.

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