Adelphia slides more, trades flat; CMS off on trade revelations; PacifiCare upsizes issue

By Paul Deckelman and Paul A. Harris

New York, May 16 - Adelphia Communications Corp. continued to deliver bad news to its investors Thursday, as news reports - neither confirmed nor denied by the company - indicated that the troubled cable television operator had missed coupon payments which came due Wednesday on several issues of its bonds. That helped push the company's debt - already sliding badly - down still further. Also on the downside were the bonds of CMS Energy Corp., after the power producer admitted that some $4.4 billion of its electricity trades - really, most of its volume for 2000 and 2001 - were essentially bogus shell trades that had no economic value, but which only served to pump up its volume totals. The executive in charge of trading resigned.

In primary market activity, the PacifiCare Health Systems deal that hit the road Tuesday at $200 million took a massive $300 million transfusion on Thursday.

PacifiCare's deal priced at $500 million, increased from $200 million. The seven-year senior notes (B3/B-) were sold at 99.389 to yield 10 7/8%, according to a syndicate source who added that it came "in the middle" of the 10¾%-11% talk. Morgan Stanley was bookrunner.

On May 1 the Santa Ana, Calif.-based health insurer reported an $859 million net loss in the first quarter after an $897 million goodwill write-down, which it attributed to a change in accounting procedures.

More recently, on Tuesday the company reported that it had received subpoenas from the U.S. Attorney's Office in Boston regarding its distribution of prescription drugs.

Other than PacifiCare, Thursday turned out to be a quiet day around the high yield primary market. Hence more than passing attention remained fixed on the "the Trump deal."

Sources from both the company and from the syndicate told Prospect News prior to mid-day Thursday that Trump Casino Holdings, LLC/Trump Casino Funding, Inc.'s $470 million is still in the market.

The company source reiterated what the market has known since May 9: that Trump has cleaved what was originally a first mortgage notes offering into one tranche of $340 million of first mortgage notes (B3/B-), talked at 9¾%-10%, and one tranche of $130 million of second mortgage notes (CCC), talked at 12¾%-13%.

The syndicate source told Prospect News that a more recent report that Trump further supported the deal - which was already guaranteed by properties in Atlantic City, N.J. and Gary, Ind. - with the Trump 29 Casino near Palm Springs was also true.

In one further development Thursday the company made another 10-Q filing with the Securities and Exchange Commission correcting an error that appeared in the previous day's filing.

Wednesday's version read "The interest rates of the first mortgage notes and second mortgage notes, as well as other terms of the offering, have to be determined. There can be assurances, however, that the offering will be completed as proposed or otherwise."

Thursday's revision clarified that instead of the phrase "...there can be assurances..." the company intended to state "...there can be NO assurances..." Curiosity about the original statement circulated the market following Wednesday's filing, given the wording that appeared that day. Observers were keen to know if Trump was a so-called "bought deal" - in other words one that the investment bank had agreed to own in the event that investors ultimately did not participate. This, officials from both the company and from Deutsche Bank Securities, Inc. assured Prospect News, was not the case.

In any event late Thursday the terms on "the Trump deal" had not emerged and one market source told Prospect News late in the session that terms were now expected until Friday.

Throughout the week, sell-side sources have noted sensing a touch of slowness in the primary market. This they attribute to the approaching Memorial Day holiday which underwriters are loath to straddle with roadshows. And they have also attributed the slowness to an uneasiness which they say must be in play on the buy-side, with credits such as WorldCom falling into high yield from above, and the weight such masses of debt bring to bear upon the much smaller high yield market.

One sell-side source who spoke Thursday with Prospect News allowed that investors might be indulged for keeping a weather eye out for bonds falling from above.

"I think investors are focusing on those positions in their portfolios right now. And maybe they are not quite as focused on what's happening in the primary.

"They want to know the value and disposition of those credits."

Finally on Thursday price guidance of a mid-10% yield was heard on D&E Communications, Inc.'s offering of $175 million of 10-year senior notes (B2/B), according to a syndicate source who added that the deal will possibly price Friday. Jefferies & Co. is the bookrunner.

In secondary activity, Adelphia "has taken over as the bond de jour " from the embattled telecommunications giant WorldCom Inc., a trader asserted. WorldCom's bonds had been gyrating actively all week on market concerns about its liquidity situation - but after Wednesday's news that WordlCom would draw down on its $2.65 billion credit line, with the apparent approval of its key lenders, while negotiating a larger replacement facility - WorldCom's bonds were described by junk marketeers Thursday as essentially unchanged. Its benchmark 7½% notes due 2011 were unchanged around the 42 level, while its 6.40% notes due 2005 stayed around 51 bid, and its 8¼% notes due 2031 remained in the 39 bid area.

But if dealings in previously busy WorldCom were suddenly sleepy, Adelphia was anything but.

Early in the day, the company announced that its chief financial officer, Timothy J. Rigas had resigned, following in the footsteps of his father, John J., who had stepped aside as chairman and chief executive officer on Wednesday amid mounting controversy over loans to partnerships controlled by the family and guaranteed by Adelphia. The disclosure in March of that $2.3 billion of off-balance-sheet obligations related to those loans started the once-high-flying Adelphia's bonds and shares on a steady downward spiral, resulting in ratings agency downgrades and even a Securities and Exchange Commission investigation.

Adelphia itself promised to get to the bottom of things; in the same news release announcing the resignation of the younger Rigas, the company also announced that "a Special Committee of the Board consisting of three independent directors will have broad powers to conduct a full and thorough investigation into a number of issues, including ones regarding transactions between the Company and certain entities controlled by the Rigas family."

But any positive boost Adelphia's securities may have been poised to get from the announcement of the younger Rigas' resignation and the impending company probe quickly got lost in market buzz that Adelphia had failed to make coupon payments that came due Wednesday on several series of bonds, a sure sign that money was getting tight at the Coundersport, Pa.-based Number-6 U.S. cabler.

Adelphia would neither confirm nor deny the missed payments; a company representative told Prospect News late in the session only that that no statement had been issued.

News reports said that Adelphia had failed to make some $38 million of interest payments: $23 million on its 9 3/8% coupon notes due 2009, and a total of $14.8 million on its 8 3/8% notes due 2017 and 10 5/8% notes due 2006. If the payments were in fact missed, Adelphia would have 30 days in which to make good on the payments to avoid a default.

A trader said that as a result of the reported failure to make the interest payments, Adelphia's bonds were now trading flat, or without their accrued interest, an event which generally occurs when an issuer misses a coupon payment, goes into bankruptcy or otherwise defaults. The changeover from trading with accrued interest to trading flat effectively amounts to the loss of several additional points beyond the nominal change in the bonds price.

The trader said that all of Adelphia's actively traded short and intermediate-maturity bonds - which had swooned some 15 points in Wednesday's session to around the 70-71 level on the turmoil at the top and the company's other problems - had fallen as low as 62 bid/64 offered at the opening, eventually bouncing off those lows to close around 69 bid/71 offered, up from their lows of the day but still down on the session.

A distressed-debt trader opined that the bonds, while trading flat, "were trading a little bit better [than their earlier levels] toward the end of the day. But people are still afraid of what they don't know - and with Adelphia, there's a lot that they still don't know."

At another desk, the 9 3/8% notes were seen as low as 67, trading flat. Other Adelphia issues were in that same region, with the 10 7/8% notes down two points to 69.5, flat, while its 10¼% notes due 2006 lost three points, to end at 69, flat. The 2017 notes meantime had most recently been quoted down around 54 bid.

Apart from Adelphia, a trader saw CMS Energy "melting down," its bonds pegged "much lower" amid the company's confirmation that most of its electricity trading activity in the prior two years had been "round trip" trades with other large players, notably Dynegy Inc. and Reliant Resources Inc., with the companies essentially swapping identical energy contracts at the same prices. Such trades produced no economic advantage for either party, but pumped up the companies' trading volume figures, making the market look more liquid than it really was and making the companies involved look like bigger players.

"They were off quite a bit on that news," he said of the CMS bonds. The $4.4 billion of sham trades was "a big chunk of their revenue. And any time this is on the front page of The Wall Street Journal [it was the top story in Thursday's issue], it just crushes the paper." He quoted CMS's 7½% notes due 2009 trading below 90 bid, more than a dozen points below their recent levels around 101 bid/102 offered.

During the session, CMS announced that Tamela W. Pallas stepped down as president and chief executive officer of the Dearborn, company's Houston-based energy marketing unit. Pallas expressed regret over having sanctioned the trades, which CMS Chairman William T. McCormick, Jr. Called "not consistent with the company's values and high standards of integrity."

Another market source saw CMS "down quite a bit," with its 8.90% notes due 2008 dropping to 92.5 bid from prior levels just under par.

Also apparently hurt by the burgeoning controversy over the bogus electricity trades - even though it has not been named as a party to any of them - was AES Corp., whose 9½% bonds were being quoted down five points, to 77 bid/79 offered. However, another player in that same industry, Calpine Corp., "was hanging in," the trader said, its 8¾% bonds still around their recent 84 bid/86 offered levels, although elsewhere. Calpine's 8 5/8% notes due 2010 were being quoted three points lower, at 78.

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