Adelphia Hit by Off-Sheet Debt Report

Adelphia Communications Corp. took investors by surprise Wednesday when the nation’s sixth-largest cable operator acknowledged that it has $2.3 billion in debt not included on its balance sheet.

The company also reported a larger-than-expected fourth-quarter loss as a result of a $1.5-billion write-down on the value of a former telephone venture, Adelphia Business Solutions, which filed for bankruptcy protection Wednesday. Adelphia spun off its 79% stake in the phone venture to the public in January to reduce the debt of its cable company by $1.7 billion.

Investors drove down Adelphia shares Wednesday by $3.69, or 18%, to $16.70 in Nasdaq trading. Wall Street has been wary of any company using off-balance-sheet financing practices after the December bankruptcy filing of Enron Corp., which used private partnerships to shift debt off its books.

In the case of Adelphia, the controlling Rigas family has been borrowing money through a privately held partnership it controls. The family in effect shifted debt from Adelphia Communications to the off-balance-sheet partnership, called Highland Holdings, whose loans were guaranteed by the public company.

Though analysts say the practice is not illegal, investors say it is inappropriate and undermines the company’s credibility on Wall Street.

Standard & Poor’s Corp. said it may cut Adelphia’s BB- credit rating if the company does not have sufficient assets to support a higher debt level. “We have to evaluate the situation,” said Richard Siderman, an analyst at the credit-rating firm.

Even before the disclosure Wednesday, Adelphia was among the most leveraged of the major cable companies, with debt of $14.7 billion. As part of an industrywide consolidation, Adelphia bought several cable rivals in recent years, including Century Communications Corp., the leading cable operator in the city of Los Angeles, where the Rigas family now serves more than 500,000 customers.

In addition, Adelphia, like other cable companies, has invested heavily over the last five years to upgrade its facilities with digital technologies, enabling it to sell Internet access and interactive TV services.

Because of its reliance on debt, Adelphia financially has had close calls throughout its 40-year history. The company has a reputation on Wall Street for using complex financial instruments that have made its structure difficult to understand.

Adelphia, which is based in Coudersport, Pa., said the $2.3 billion in debt is part of a “co-borrowing” arrangement with affiliates. In a conference call with investors Wednesday, Adelphia Chief Financial Officer Timothy Rigas said there are substantial assets to back up the debt in those affiliated companies, which are controlled by the Rigas family, but he would not be more specific.

Rigas indicated through a company official late Wednesday that the off-balance-sheet financing was previously and appropriately disclosed to investors. Yet many investors said they heard about the off-balance-sheet debt for the first time Wednesday, when Rigas mentioned it in the earnings call.

Some investors worry that the assets in these private ventures may not be enough to cover the debt.

“The value may well fall short of the debt, which means their overall credit rating could be affected,” analyst Siderman said.

One investor with knowledge of the family-controlled Highland Holdings, said the partnership holds 60 million Adelphia shares and owns cable systems that service 300,000 customers. At current market prices, the cable systems could be worth $1 billion or more. At Wednesday’s closing price, the 60 million Adelphia shares are worth $1 billion.

The investor said the company may be forced to sell the cable systems in the partnerships to cover the debt. The most valuable of those systems serve about 50,000 subscribers in San Diego, according to one investor.

In the conference call Wednesday, Rigas would not say how much money Adelphia would lose because of the bankruptcy filing of its phone venture.

Adelphia was more aggressive than any other cable company its size in pursuing the phone business. Despite a wary Wall Street, the company, through a separate, publicly traded entity, invested billions of dollars building a fiber-optic network across the country to handle telephone and high-speed Internet traffic.

But the glut of “bandwidth” that contributed to the collapse of companies such as Global Crossing also hurt Adelphia’s phone venture.

Adelphia Communications said its net loss for the fourth quarter quadrupled to $1.3 billion, or $6.95 a share, from a net loss of $255 million, or $1.73, a year earlier.

Revenue increased to $950 million from $804.6 million in the year-ago quarter.

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Cable Crash

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