Deutsche: Switch out of Adelphia 6% into 3.25% for yield pickup

By Ronda Fears

Nashville, Tenn., April 10 - Deutsche Bank Securities Inc. convertible analysts recommend switching out of the Adelphia Communications Corp.'s 6% convertible notes due 2006 into the 3.25% due 2021 for higher yield and a shorter maturity due to the May 2003 put on the 2021 issue.

"Following the announcement of significant off-balance sheet liabilities, ADLAC debt and equity have been crushed by the market," said analysts Jeremy Howard, Jonathan Cohen and Robert Barron in a report Wednesday, noting the stock is down over 50% from $20.39 on March 26 to $10.51 on Tuesday.

Thus, Adelphia securities have cheapened but the Deutsche analysts prefer the 3.25% issue to the 6% issue chiefly due to the upcoming put, which shortens the effective maturity of the 3.25% bond and boosts yield.

The 3.25% issue offers 184 basis points of extra yield, the analysts said, with a 16.83% yield-to-put versus 14.99% yield-to-maturity on the 6% issue.

Thus, the higher coupon on the 6% issue is not of benefit, the analysts said.

"It has been suggested that the higher coupon on the 6% bond is supportive of the valuation because high yield funds prefer the higher income security," the analysts said in the report.

"But this sounds absurd to us. The 6% bond will pay only two semi-annual coupons of just 3% each before the May 2003 put on the 3.25% bond. Investors should hold the 3.25% for the next year and view the put in 2003 as a 'super coupon', and then switch back to the 6% bond after May 2003."

There also is potential for 12 points of capital accretion in roughly 12 months as the 3.25% bond is offered at 87.375, but putable at 100. The issue is putable in cash at par on May 1, 2003.

Conversion premium is no longer relevant, either, the analysts said, given that both bonds trade on premiums approaching 300%.

The convertible analysts also point out that Deutsche high yield analysts Andrew Van Houten, Eric Lee and Lawrence Weiss in a recent research paper noted that even if Adelphia has to assume 100% of the $2.3 billion in off-balance sheet liabilities, its credit profile remains in line with its peers.

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