Family Ties Bind Debt Holders to Adelphia

The finances of cable operator Adelphia Communications (ADLAC Quote - Cramer on ADLAC - Stock Picks) have perennially provided skeptics with reasons to snipe.

Last month was no exception.

Adelphia, controlled by Chairman John J. Rigas and his family, disclosed in Securities and Exchange Commission filings that the terrorist attacks of Sept. 11 might enable a separate family-controlled investment partnership to back out of a six-month-old commitment to invest an additional $400 million in Adelphia.

Adelphia says the family partnership expects to pony up the money. People critical of the company, including even a short-seller, say they believe the Rigas clan will fulfill its commitment.

But involving as it does two traditional hot buttons at Adelphia -- family business and business debt -- the disclosure illustrates once again Adelphia's continuing challenge to operate on a more leveraged basis than most other cable operators. And though it seems likely that the family partnership will meet its commitments voluntarily, the question remains whether economic stresses will one day hamper the Rigas family's best intentions.

Adelphia was trading at $22.34 Wednesday, down 6 cents.

Round and Round

The caveat about the terrorist aftermath appeared in filings made in October related to Adelphia's sale of $500 million in notes. As previously disclosed, Adelphia says that a Rigas-controlled entity by the name of Highland 2000 LP agreed in April to buy $400 million of convertible subordinated notes due 2021. Highland 2000 has until Jan. 20, 2002, to come up with the money.

I Owe, I Owe... Recent deals: a snapshot of Adelphia's debt
Date	Security	Amount	Comment
October 2001	10 1/4% senior notes due 2006	$500 million	Coupon raised after Moody's put Adelphia on review
September 2001	Secured revolving term credit facility	$2.03 billion
April 2001	3.25% convertible subordinated notes due 2021	$400 million	Slated to be purchased by Highland 2000
January 2001	6% convertible subordinated notes due 2006	$167.4 million	Purchased by Highland 2000
Source: Adelphia Communications

But in a new revelation, Adelphia says one of the deal's conditions is "a typical 'force majeure' clause" that enables Highland to renege on the deal after certain events, including "war or other calamity or crisis the effect of which on financial markets is such as to make it, in the reasonable judgment of Highland 2000, materially impracticable to proceed with the purchase."

By the "reasonable judgment" standard, it appears Highland has plenty of room to back out of the deal. In fact, Adelphia states that Highland "has not waived any right that it may have to terminate this ... agreement due to the events of September 11, 2001 and their aftermath."

There are several reasons to believe that Highland will go through with it. One comes from taking the Rigases at their word: The Adelphia document says Highland indeed "anticipates proceeding with the purchase by the scheduled closing date."

The second is that late last month Highland 2000 made good on a prior commitment to purchase Adelphia securities, spending more than $400 million on a mixture of common stock and convertible securities at prices set earlier this year. Russell Solomon, high-yield media analyst at Moody's Investors Service, says the Rigas family likely could have bought stock on the open market at half the price it agreed to pay in the agreement, and the convertibles were "certainly" worth less than what Highland 2000 paid for them.

Mounting? Tracking Adelphia's $14.4 billion in debt

Source: Adelphia Communications

A final reason is self-interest. The Rigas family has been running Adelphia and its predecessors for nearly five decades, and investors have long understood that the fate of the company is dependent on the actions of the family. Should the Rigases back away from their obligations to the family business, stockholders would likely be shaken by the wavering commitments of the stock's biggest supporters and head for the exits. Solomon says the Rigas family stands to lose a lot more in net worth if it doesn't spend the $400 million than it would should it overpay for securities with that money. "If they didn't go through with the transaction," he says, "the stock would get pretty beat up."

Adelphia didn't respond to a call about the transaction.

Borrowed Time?

How the Rigas family comes up with the cash for its $400 million commitment isn't likely to close the book on Adelphia's debt. Short-sellers and others say they expect the Rigases to borrow against their cable television assets, though it's unclear to what extent that might mean Adelphia stock or cable holdings separate from Adelphia.

But what the arrangement effectively means, says one short-seller, is that the liquidity of Adelphia is dependent on the liquidity of the Rigases. And though investors can evaluate Adelphia's finances from public disclosures, the finances of the Rigases and Highland 2000 are not similarly visible.

For Adelphia, which has been more highly leveraged than its cable peers for many years, that visibility hasn't been an issue, since the company has been able to keep operating without incident. And the short-seller says he doubts the Rigases have a legal obligation to disclose more about their personal finances. But in the fast-shrinking economy, says the short-seller, adverse events could quickly snowball to the detriment of the Rigases and Adelphia. "All you need is one slip," he says.