Now it's a real Adelphiasco

Rigas is target of criminal probe; Chapter 11 nears as debt violations mount

The clouds surrounding Adelphia Communications grew ever darker last week. Federal prosecutors launched criminal investigations into insider dealings by controlling shareholder John Rigas, and Adelphia started tripping several triggers in its debt agreements, threatening to plunge the company into bankruptcy proceedings.

Adelphia acknowledged that scrutiny of the company has turned from regulatory to criminal. Adelphia has been subpoenaed by two federal grand juries, one in Manhattan and the other in Harrisburg, Pa. Prosecutors are inquiring about the Rigases' use of Adelphia's financial resources for their personal benefit, ranging from guarantees of loans for family stock purchases to payments for family-owned real estate. Adelphia said the company is "fully cooperating" with the investigation.

Investors are treating the company's securities as if a Chapter 11 filing is coming soon. Adelphia's stock stopped trading last Wednesday, but banks were selling parts of its loans for 85 cents on the dollar. The most senior bonds traded for 70 cents, the most junior for 30 cents.

Translation: Investors expect some recovery if Adelphia goes to bankruptcy court, but they're discounting the paper in part for the months and months they won't see any interest payments while the company wends through Chapter 11.

"It's hard to see a way this doesn't end in Chapter 11," said Merrill Lynch junk-bond analyst Oren Cohen.

Wall Street executives were startled by the resignations of Adelphia founder and CEO John Rigas and his son, CFO Tim Rigas last week. The resignations reflected the severity of Adelphia's financial crisis, which didn't look so bad a week earlier but could cascade through the layers of the company's debt.

First, the company missed $44.5 million in interest and dividend payments on four series of bonds and preferred stock. The dividend payments are less important, but Adelphia has 30 days to cure the bond default. That seems unlikely, though, and a default on those bonds will trigger default provisions in every loan and bond deal Adelphia has.

Even if the bond default is resolved, Adelphia faces ripple effects if the company's common shares are delisted.

When John Rigas exited, Adelphia disclosed that it had suspended an audit by Deloitte & Touche, meaning that the preparation of Adelphia's annual 10-K report had stalled.

That's a huge problem: The absence of current, certified filings with the Securities and Exchange Commission makes it highly unlikely that Adelphia can delay Nasdaq's plan to delist the company from its core National Market System.

And that's bad because it triggers a problem with the holders of $2 billion in convertible bonds. Since Adelphia stock underlies the convertible bonds, a delisting means that investors can "put" the bonds back to Adelphia, demanding immediate repayment. Adelphia clearly doesn't have that kind of money, with just $156 million in the bank as of last September.

It has raised more money since then, but that came from the purchase of more convertible securities by the Rigas family, which financed the deal with loan guarantees from Adelphia.

And, finally, all of this means that Adelphia will probably not be able to draw on existing lines of credit. While banks are generally obligated to fund the lines, they can block Adelphia if it doesn't have audited financial statements available.

Any of the debt "bullets" could put Adelphia under.

Just a week earlier, the Rigases were confidently predicting that they could resolve Adelphia's problems by shedding some assets. They set a plan to sell about 40% of the company's portfolio, aiming to raise around $2.7 billion. Industry executives said investment banker Salomon Smith Barney actually started distributing offering documents to prospective buyers last week, but it's not clear that new management will proceed with the sale.

Morgan Stanley junk-bond analyst David Allen estimates that Adelphia's debt totals $2,700 per subscriber. With private-market values for cable systems generally around $4,000 per sub, Adelphia might be able to cope with its debt load. But Adelphia isn't just the South Florida and Los Angeles systems that outsiders focus on. The company paid huge prices for lots of rural and small-town systems from the likes of Century Communications and FrontierVision that could be worth as little as $2,500 per subscriber.

Meanwhile, 12%-shareholder Leonard Tow was ready to sue Adelphia to secure three seats on the board of directors that he says he's entitled to under his agreement to sell Century to Adelphia in 1999. Adelphia's new interim CEO, retired Buffalo banking executive Erkie Klaibourne, told Tow last week that the demand was a low priority for the company.