Charter, Adelphia bobble up, down; Goodyear bounces up; Community Health weakens

By Ronda Fears

Nashville, July 28 - Charter Communications Inc. and Adelphia Communications Corp. were both active Wednesday, bouncing all over the map, as the debate rekindled about consolidation in the cable sector. While both were at least briefly higher during the session, most of the Charter and Adelphia convertibles ended the day lower.

Starwood Hotels & Resorts Worldwide Inc. convertible holders continued to sell on the rumors that the New York-based hotel chain may be shifting into a real estate investment trust or split off its real estate business. But, market sources said the rest of the lodging and leisure pack of convertibles was steady.

"I can confirm the worries [regarding Starwood], but other lodging and leisure names look okay," said a fund manager on the West Coast.

Otherwise, he added, "the tape is pretty bad."

All the airline paper was marked lower, dealers said, but activity was quiet in that group. A spike in oil prices hurt those stocks, but Northwest Airlines Corp. also was downgraded by Standard & Poor's.

In another standout decline, Community Health Systems Inc.'s convertible lost a couple of points on call risk after the company filed a $1 billion shelf registration to sell stock and convertibles, and talk on its effort to reprice $1.55 billion of bank debt put the rates lower by a whopping 75 basis points. A trader put the Community Health 4.25% converts at 101.25 bid with the stock at $25.05, which was down 95 cents on the day, or 3.65%.

To the plus side, The Goodyear Tire & Rubber Co. continued to see buying interest ahead of its earnings next week, in addition to a nice pop in the stock on short covering, as the company began refinancing its bank debt as promised.

"The last few weeks converts firmed up and moved up. This week it seems flattish," said a lead convertible trader at a huge hedge fund based in New York. "I don't see a lot of selling, but I don't see a lot of buying either."

Charter settles SEC inquiry

Charter announced the Securities and Exchange Commission has concluded its enforcement action against the company resulting in a settlement whereby Charter neither admitted nor denied any wrongdoing and was not assessed a fine.

Resolution of the probe into Charter's methods of determining subscriber numbers and various accounting practices was basically anticlimactic, however.

"The SEC 'settlement' is a non-event," said a buyside trader, adding with a note of sarcasm, "Amazing, huh, that this great news that was going to send the stock to the moon cannot overcome this selloff's gravitational pull."

S&P analysts noted, too, that Charter still faces considerable challenges in reducing high financial risk characterized by roughly 10 times debt-to-EBITDA and negative free cash flow, which limit the likelihood of credit measure improvement without deleveraging financial actions.

Some of the speculation circulating puts Cox Communications Inc. in the lead among suitors for Charter.

"The merger of Charter and Cox would unite the Cox billionaires with Paul Allen, although I would prefer a buyout to any sort of merger," said the buyside trader.

There also is some chatter, or hopeful thinking, about Verizon looking to pick up a cable name like Charter, he said.

"Verizon plans to spend $1 billion to fiber one million homes in California and that leaves another 39 million Verizon homes without fiber. Unless Verizon gears up, it can't afford to buy video or TV programming at any cost," he said. "This fiber-to-home campaign is a prelude to buying a cable company."

Charter's convertibles were both lower, by 1 to 2 points, with the 4.75s of 2006 quoted at the close at 88 bid, 89 offered at the 5.75s of 2005 at 91 bid, 92 offered. Charter shares lost 7 cents on the day, or 2.17%, to end at $3.16.

Charter as Adelphia suitor, too

Charter is also seen as a suitor for some or all of the Adelphia cable assets, among others such as Cox, Comcast Corp. and Time Warner Inc. - all of which were lower Wednesday.

Adelphia convertibles were "bouncing all over," trading up as well as lower anywhere from 22 to 26, a sellside dealer said, on the merger chatter abounding in the cable sector.

Another sellside convertible dealer said the Adelphia 3.25% convertible bonds ended off about a half point on the bid side and the Adelphia 6% convertible bonds off about a half point of the offer side.

"I can see [Paul Allen, chairman of Charter] going in with partners" to buy Adelphia out of bankruptcy, the trader said.

"If the price for the whole shebang is $18 billion, then $8 billion of that is the assumption of the debtor-in-possession facility. Of the $10 billion remaining, Paul puts up $3 billion and gets a partner or partners to put up $7 billion," he continued.

"Then, [Carl Vogel, chief executive of Charter] steps in, administering all the Adelphia assets for a fee. Vogel leads the executive group that starts to swap, trade, and sell off Adelphia assets to Comcast, Cox, Time Warner, et cetera.

"Charter keeps what's most valuable to its systems and pockets up to $7 billion cash in the process and pays off some of Charter's debt with the cash."

Goodyear up on short-covering

In anticipation of nice earnings from Goodyear next week, convertible traders noted considerable short covering in the stock Wednesday. That pushed up the convertible higher, but there also were still buyers for the new paper.

Goodyear's new 4% convertible bonds rose about 2.25 points to around 114 bid, 114.375 offered with the stock gaining 38 cents, or 3.67%, to $10.74.

"There's a boatload of shares held short, a lot by the convert arbs, and with the earnings guidance looking very good, some are hoping to avoid getting caught in a short squeeze," a trader said. "It all depends on the earnings report coming out next Thursday [Aug. 5]. At the current price, the market doesn't seem to believe Goodyear will hit the estimate, but if they beat it, the squeeze is on."

Last week, Goodyear said it expects second quarter sales of about $4.5 billion, up from $3.8 billion a year ago, which would beat the First Call analyst consensus for $4.1 billion. The company also announced it would abandon efforts to sell its chemical unit, which initial buyside sources thought would be a "drag on the story."

"I think the jury is still out on the chemical unit," said a buyside trader. "I still think this will be a negative long term."

Also Wednesday the market was looking favorably on Goodyear's bank debt refinancing, which it promised to pursue. Last week, management said the company would refinance its $680 million senior revolving credit line, due April 30, and a new $500 million revolver secured by the same collateral, due in 2007.

In the bank loan market Wednesday afternoon, Goodyear's new bank paper was seen pricing in the area of 450 basis points over Libor.

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