Adelphia lower on delisting but El Paso, Williams firm up

By Ronda Fears

Nashville, Tenn., May 31 - It was another sloppy session in the convertibles market with thin trading, but participants expect the pace to pick up next week with a busier new issues calendar. The market has been expecting some energy mandatories, following TXU's newest deal, and American Electric Power filed Friday to sell a $300 million mandatory with pricing seen in mid-June.

Meanwhile, the market was enwrapped with the continuing saga of Adelphia's woes - which worsened Friday with news of the stock being delisted - and troubles among the power group. While Adelphia was lower, El Paso and Williams were higher as a few buyers stepped in.

There was very little activity in Adelphia, however, traders said, because as one put it, "there's no buyers for this paper," following the Nasdaq's decision to delist the stock on Monday because Adelphia failed to meet the extended deadline to file its 10-K annual report at the SEC

"The convertibles are putable now since the stock was delisted, but so what. No one is betting that they're going to come up with $1.4 billion over the weekend," said a convertible trader at a hedge fund in New York.

"They may have a fire sale and have a huge capital injection. We're not betting on it. More and more people are leaning toward a bankruptcy filing soon. There's too much contention within the ranks at Adelphia still, even though the Rigases are gone."

Delisting of the shares requires Adelphia to make an offer to buy its 6% and 3.25% convertibles, which could force it to come up with $1.4 billion in cash.

Adelphia is already short on cash and has missed several interest payments on bonds, so most onlookers believe it would be difficult to pay convertible bondholders if not impossible.

"I think if the convertibles are put back to the company, the banks will step in and stop the company from paying that put," said a convertible trader in Boston.

"The banks won't allow them to pay out a big chunk of cash like that. I'm sure there's something in the bank covenants that will supersede a big cash outlay like that when they are in such dire straits."

Another blow to Adelphia was media reports Friday that talks with Charter Communications Inc. to sell its coveted Southern California cable assets broke down.

Highfields Capital Management, with a 6.5% Adelphia stake as a 3.25% convertible holder and stockholder, urged in an SEC filing that Adelphia conduct an orderly sale of the entire company rather than piecemeal assets in fire sales at the expense of investors and creditors.

"Our conclusion from an analysis of Adelphia's assets, liabilities and recent disclosures is that the fair market value of the company's assets substantially exceeds its liabilities. We believe that Adelphia can provide all of its creditors with a full recovery and maximize value for shareholders if it reorganizes itself in an orderly fashion," said Highfields portfolio managers Jonathon Jacobson and Richard Grubman in the filing.

"The company is currently facing insolvency by dint of a liquidity crisis, not a lack of asset value. We understand that Adelphia is rushing to sell some of its most valuable assets in an effort to stay afloat in the near term."

A distress sale, the fund managers said, would be tantamount to "burning the furniture to keep the house warm" and will result in a huge permanent loss of value.

"Given the desirability of the company's assets we urge you to put the entire company up for sale and hire bankers to conduct an orderly sale process. This will instill confidence in Adelphia's creditors that they will be paid in full and in a much shorter time frame than would be achievable in a bankruptcy proceeding," Jacobson and Grubman said.

"To be clear, we believe that the sale of any of Adelphia's assets, and in particular its prized Los Angeles holdings, without the benefit of a full auction conducted in the absence of severe time pressure, will do irreparable harm. Investors expect and demand that you exercise better judgment and common sense than your recent actions suggest."

Adelphia's 3.25s were quoted down 3 points to 39 bid by one dealer and flat at 40.5 bid by another. The 6s were quoted flat at 38 bid by one dealer and off 0.5 point at 39.5 bid by another.

Adelphia shares closed down 46c to 70c.

Charter's convertibles were 0.5 point lower with the 4.75% issue at 66.125 bid and the 5.75% issue at 73 bid. The underlying shares closed down 19 to $6.97.

The energy and power group, also embattled, was heading north for the most part, however.

"There's a better comfort level with the energy and power names, at least way better than Adelphia," said a dealer.

American Electric Power filed to sell $300 million of mandatories, on the heels of the TXU pricing, bringing to fruition market expectations of new mandatory deals from energy names. The deal is seen pricing in mid-June, with a full road show to pitch the company's story.

Despite the turmoil in the power group due to so-called round trip energy trading to artificially inflate revenues, in which TXU is involved, salesmen said there was strong interest in the new mandatory.

"TXU's involvement in the round trip or wash trades is not a big deal in the scheme of things," one salesman said.

"Our market is familiar with the name, they have a convertible out there. The yield was not incredible, but it was decent and I think people believe there's upside potential not only in TXU but several in that group."

American Electric Power is also involved, and along with announcing the new mandatory on Friday made a statement asserting it has not been involved in any wash trades or round trip trading. The company has been questioned by the Federal Energy Regulatory Commission.

"Our focus is profitability, not volume," said E. Linn Draper Jr., AEP's chief executive.

"Management has been consistent in its position that we should only undertake activities that have economic substance. Neither revenue nor volume is a factor in our compensation plans, so there is no incentive for our traders to enter transactions solely for the purpose of inflating reported revenue or volumes."

The new TXU 8.125% mandatory was upsized to $440 million from $250 million on very strong demand, and closed slightly above par at 50.02. TXU shares ended up 18c to $51.33.

El Paso's slide was stemmed when "a few buyers" showed up, one trader said. Williams was also higher.

The El Paso 4.75% convertible preferreds were still difficult to get a consistent level on, however. The issue closed on the NYSE up 0.79 point to 39.8. One dealer quoted the issue up 2 points to 40.625 bid and another quoted it up 0.375 point to 32 bid.

El Paso shares added 15c to $25.65.

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