Adelphia convertibles continue to slide on off-balance sheet debt

By Ronda Fears

Nashville, Tenn., March 28 - Adelphia Communications Corp.'s convertibles continued to slide Thursday in the wake of its off-balance sheet debt disclosure, as uncertainty and resentment among investors caused a passionate backlash. Dealers said investors were angered by the lack of transparency and most were selling, although there still was some buying on the weakness.

"The lack of disclosure smacks of wrong-doing because you have to remember that they've brought several deals to market post-Enron," said a convertible trader at a hedge fund in New York.

"There was some people buying on the weakness and we were glad to let go."

About an hour before the close, the Adelphia 6% convertible notes due 2006 (B3/B) were down 5.5 points to 73.625 bid, 74.5 offered and the 3.25% convertible notes due 2021, which are putable in May 2003 at par, were down 1.875 points to 88.625 bid, 89.125 offered. The newest 7.5% mandatory convertible due 2005 was quoted down 2.25 points to 16.625.

The converts were quoted with the stock at $14.72. At 3:17 p.m. ET, the stock was down $2.01 to $14.69.

"This situation really enraged some people," said a convertible trader at one of the major investment banks in New York.

"There may not be the full threat of bankruptcy with Adelphia, but $2.3 billion of debt is a pretty good chunk of money and it really impacts the creditworthiness, and certainly the trustworthiness, of the company."

S&P put Adelphia on watch with negative implications, including the B rated convertible subordinated notes and B- rated mandatory convertibles following the news Thursday. And Moody's Investors Service reiterated its review for downgrade on Adelphia's ratings, currently B3 for the convertible notes and Caa1 for the mandatory convertibles.

Sri Nadesan, a convertible analyst at Wachovia Securities, said the revelation could push the credit rating down a couple of notches, and advised caution with regard to Adelphia overall.

Deutsche Bank equity analysts were still recommending a buy on the common stock, but that did not mean that the convertibles were being recommended as well.

"We've never had the Adelphia convertibles on our recommended list," said Jonathan Cohen, a convertible analyst at Deutsche Banc Alex. Brown.

"There's a great deal of uncertainty that's going to have to be hashed out in the markets."

During its earnings conference call, Adelphia revealed that $2.28 billion of recourse debt co-borrowed with managed entities owned by the Rigas family was not included on Adelphia's balance sheet. The money apparently was borrrowed by the Rigas family to purchase some of the stock and mandatory convertibles Adelphia sold in November and January.

"Unfortunately, not too much information is available, as the company was not forthcoming about the details on the call," Nadesan said.

"The presence of this recourse off-balance-sheet debt is a credit-negative revelation and could lead to as much as a two-notch credit downgrade, in our opinion. We must caution investors that there is much we do not know about the nature of the managed entities and their full impact on the company's balance sheet."

Based on what is known at this point, Nadesan said if the entire $2.28 billion of the recourse and off-balance-sheet debt is added to the company's pro forma 2001debt levels, the leverage ratio for the cable unit would balloon to 10.0 times, because long-term debt would rise to $14.3 billion.

The cable-only (excluding Adelphia Business Solutions) long-term debt at Dec. 31 was $11.56 billion the cable-only leverage ratio at the end of 2001 was 8.4 times.

"We are not assuming any EBITDA contribution from the 300,000 or so subscribers housed in the managed entity," Nadesan said, because "presumably the Rigas family owns the cash flows associated with the entity, whereas Adelphia appears to be on the hook for the debt."

At the end of 2002, Nadesan estimates Adelphia's long-term debt to EBITDA ratio would be 8.5 times excluding managed entity debt and 10.0 times including it.

All of this overshadowed the company's fourth-quarter results, which were generally positive and led Deutsche equity analysts Karim Zia, Michael J. Regan and Alexander Chaung to continue to recommend the stock story.

"We view the company's status, even under extreme adverse scenarios, as ultimately well supported by the asset value of the cable business," the Deutsche analysts said in a report Thursday.

"We view ADLAC as somewhat speculative until the complete financial picture of the Rigas family meets full disclosure. However, given implied upside to our $42/share target price, we maintain our buy rating.

Adelphia shares are now selling at 11.5 times 2002 EBITDA, the equity analysts noted, which is back to the stock's historical discount to the cable sector average, which is at 13 to 14 times EBITDA.

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