Sell-side cable analysts are sharply divided in their outlook for the bonds of Adelphia Communications, in the wake of the cable company's disclosure of $2.3 billion in off-balance sheet debt. David Allen, high-yield cable analyst at Morgan Stanley, says that though he does not support the lack of disclosure by the Rigas family (which owns Adelphia) regarding its accounting practices, he believes the bonds are undervalued. He raised his ratings on the company's three senior notes issues from "outperform" to "strong buy" after they dropped 14 points in the wake of the recent disclosure, and the announcement that the company would be late in filing its annual report pending a review of its books by Deloitte & Touche.
Allen says he expects Deloitte & Touche to be quite conservative in determining how much of the debt should be transferred to Adelphia's balance sheet. Nonetheless, even if all of the debt is transferred, he believes the bonds are money good. He argues that fair value for the 10.875% notes of '10 (B2/B+) is in the high 90s, compared to last Wednesday's price of 89. If the auditor were to resign, Allen would revise his view. However, he sees that likelihood as very small. He believes the next step is for the company to sell assets to reduce debt.
Another sell-side research pro is far less sanguine, citing other recent cases such as those of Pinnacle Holdings and Cumulus Media, where companies have come out with surprising negative news and then said nothing for a while before following with even worse news. The analyst says added leverage is already over $2.8 billion, because the $2.3 billion figure does not account for additional debt in 2002 that was not included in the company's recent announcement. The bonds are money good, the analyst says, but could drop to the mid-80s if filing delays continue.