One might think Adelphia Communications’ filing for bankruptcy protection Tuesday would satisfy the company’s bad-news quota for the week. Unfortunately, the situation is getting worse.
C, according to Dow Jones. While that number is smaller than the $24.4 billion in assets listed by the crippled cable television operator, the debt is at least $1 billion more than the most recent calculations of Adelphia’s debt as of Dec. 31.
The bankruptcy filing serves as the last rites for Adelphia’s common stock, but Wednesday’s debt disclosure spotlights a hazard for those investors willing to speculate in Adelphia’s distressed debt.
With the market value of Adelphia’s bonds sliding they reportedly recorded a major percentage drop Wednesday from Tuesday’s levels the price may look right for Adelphia’s bonds. But buyers face the risk that more nasty surprises will be uncovered as Adelphia’s current management attempts to produce accurate financial statements and clean up the company’s financial condition.
“Every time you look, the debt goes up and the assets go down,” says one money manager who is short Adelphia’s debt.
Unlike telecom companies that have gone bankrupt in recent months, Adelphia does indeed reap real cash revenue each month from customers who comprise a proven asset in the cable television business, and could be sold by Adelphia to raise cash.
But the money manager, who spoke on condition of anonymity, points out that there are several elements of Adelphia’s situation that cloud the value of its subscribers. For example, Adelphia has already acknowledged that its subscriber count may be overstated, so the subscriber count will perhaps undergo further downward revisions.
Meanwhile, the money manager says the debt appears to be rising. In late March, Adelphia said it had $14.7 billion in total debt. Two months later, Adelphia’s new management tentatively decided that $2.5 billion in debt should be added to the balance sheet to reflect the company’s liability for loans incurred by the Rigas family who previously controlled Adelphia.
Those numbers total $17.2 billion in debt as of Dec. 31, $1.4 billion less than the total debt listed in Adelphia’s bankruptcy filing.
An Adelphia spokesman had no comment on the debt figures.
The money manager and others say that the demand for Adelphia’s subscribers will be less than it might have been in the past, diminishing the price that Adelphia will be able to get for its systems in asset sales. “All the natural buyers are out of the market,” says the money manager.
Among the absent, he says, are telcos who were enthusiastic purchasers of cable companies in past years. Charter Communications, a cable company often mentioned as a potential buyer, is so highly leveraged that Paul Allen, the billionaire who controls the firm, would be better off buying back his own company’s debt than he would be taking on additional debt to buy Adelphia systems.
Todd Bernier, a stock analyst at Morningstar, says Comcast’s impending deal to merge with AT&T’s AT&T Broadband will take another two potential buyers out of the market.
“Honestly, I really don’t know who’s going to come along [to buy Adelphia’s systems] other than private equity [firms] , in which case they’re not going to get $3,500 per sub,” Bernier says. A price of $2,500 to $3,000 per subscriber is more likely, he says.
Yet another risk for Adelphia’s bond investors is posed by the recent descent of WorldCom’s debt to junk status, according to a second money manager who asked to remain anonymous.
That’s because the volume of new junk debt on the market is overwhelming the firms that invest in distressed debt, he says. “Even though Adelphia has attractive product right now, there’s so much more product that’s available,” says the money manager. “There are a lot of bonds competing for the same dollars Adelphia might be competing for.”