At least two sell-side cable industry analysts and one investor say bonds of Adelphia Communications, currently in Chapter 11, have a good chance to recover par, possibly with interest that has accrued since Adelphia's default. Adelphia's 10.25% notes of '11 were bid at 80 last Friday, up some 8.5 points since the end of September. Roughly one year ago, the bonds were languishing in the 20's. The company reported solid results for August, and Aryeh Bourkoff, fixed-income and equity cable analyst at UBS Research, argues that the company is poised to report a strong September performance due to seasonal trends and continued EBITDA improvement. He argues that Friday's trading levels valued Adelphia well below the industry average on a per-subscriber basis, suggesting plenty of room for upside if investors come away with an equity stake in a restructured company.
Adding to the bullish case is that Comcast Corp.'s acquisition of AT&T's cable business looks increasingly successful, making other acquisitions seem likely in the cable space. "Adelphia would make a logical acquisition candidate once it emerges from bankruptcy," says Bob Ryan, analyst at Banc of America Securities.
The fact that the whole high-yield market has been on a tear over the last year has not hurt in drumming up investor interest, either. "Most of the high-yield cable sector bonds had a strong rally and are relatively tight. The only real strong investment opportunities in the sector are in Adelphia and Charter [Communications ]," Bourkoff says.
The recent price run-up in Adelphia paper increases investors' optimism that the company will emerge from Chapter 11 relatively quickly. "Many of the key creditors are in or at the money, so there's less to gain from squeezing every nickle out of inter-creditor disputes," says BofA's Ryan, who sees the company emerging from bankruptcy some time in the second half of next year, if not sooner.
One investor sees next April as a best-case scenario, but says that if the bonds recover par, investing at last Friday's levels would return nearly 25%. There is even a possibility that investors would stand to gain accrued interest, he says.
Lazard Freres & Co., Greenhill & Co., Kasowitz, Benson, Torres & Friedman, advisers and counsel to the company and unsecured creditors, either declined to comment or did not return calls.