Adelphia Communications Corp. has got some explaining to do. It might start today, when it is expected to file its annual report with securities regulators.

And that could just be the first step that investors demand it take, some analysts believe. The Coudersport, Pa.-based MSO might also have to start selling some of its 5.8 million subscribers to pay off some debt.

But first, shareholders want a lot more detail concerning $2.3 billion that was housed in co-borrowing agreements kept off the No. 6 U.S. cable operator's books, as the company disclosed last week. That surprising revelation came at the tail end of Adelphia's fourth-quarter conference call on March 27.

The call started off smoothly, with officials touting better-than-expected digital subscriber growth and revenue and cash-flow increases of 9 percent and 19 percent for the quarter.

The tone changed after Merrill Lynch & Co. high-yield debt analyst Oren Cohen asked about off-balance sheet debt and what backed it, aside from about 300,000 cable subscribers contained in Highland Holdings Inc., a partnership of the Rigas family, Adelphia's controlling shareholders.

Adelphia management didn't have an answer.

"There are substantial other assets that back this beyond the cable systems that are owned there. We've not provided any further breakout beyond that," vice president of finance Jim Brown said on the call.

When Cohen pressed for more details — saying that information could help analysts further understand the impact of those co-borrowing agreements — Brown became even more vague. "We'll continue to review the level of detail beyond what we've provided today with regard to that," he said.

Adelphia chief financial officer Tim Rigas stepped in, but didn't add much. "We're very comfortable that the debt can be paid off," he said. "We will try to see if we can give you more clarity on that."


That wasn't enough for investors, who saw the off-balance sheet debt as a red flag and proceeded to sell off their shares. Adelphia's stock dropped 18 percent, or $3.69, to close at $16.70 on March 27 — a new 52-week low.

The carnage continued the next day, when the stock lost another 10.8 percent, or $1.80, to close at $14.90. By the end of March 28, Adelphia had lost more than $1 billion in market value.

The value of their own holdings is enough incentive for the Rigases to act to shore up the stock. But if they are unable to stop the slide, Adelphia could become an attractive takeover target for other operators, one MSO executive who asked not to be named said last week.

"I haven't run the numbers as to how much per sub, or what multiple of cash flow this [stock] price equals, but assuming [the stock price] continued to get depressed, you would think AOL [Time Warner Inc.], or Cox [Communications Inc.] or somebody would go after them," the executive said.

Cohen's persistence focused attention on just how Adelphia's ruling Rigas family has financed some rather large stock purchases over the past few years.

The answer appears to be through off-balance sheet borrowings made by private Rigas family partnerships and secured by Adelphia.

Though Adelphia said in its fourth-quarter press release that it does not expect to have to pay that debt, the company admitted it is liable in the event of a default. That, analysts said, is enough to include the debt on Adelphia's books.

Analysts, including Cohen, have previously expressed concern regarding stock purchase agreements that the Rigas family has made in order to raise money to service debt and to cable systems.

According to Cohen, since 1998 the Rigas family has paid about $1.8 billion as a result of convertible stock agreements through which Adelphia stock was bought for more than twice its contemporary price.

The next payment of about $211 million comes due in August.

Cohen estimates that of $2.3 billion in the co-borrowing agreements, roughly $1 billion is attributable to Rigas family stock purchases.


"How are these guys funding their stock purchases? Why haven't they been getting margin calls?" Cohen asked in a separate phone interview. "The answer is in the press release and on the conference call — it's been funded through this co-borrowing arrangement. My analysis is that a good portion of that $2.3 billion was used by the Rigases to buy Adelphia stock."

One analyst who asked not to be named said he fielded at least 40 calls last week from angry investors, who said they felt betrayed by the Rigases.

"People thought that the Rigas family was stepping up and showing faith in the company by investing all their money in it," the analyst said. "Meanwhile, they were doing it with Adelphia shareholders' money."

Others tried to put a good face on the situation. Several Wall Street analysts put out research notes that called the sell-off an overreaction.

In a note, Salmon Smith Barney Inc. cable analyst Niraj Gupta stressed that the off-balance sheet debt was guaranteed by Adelphia and does not represent a current obligation to the parent company, except in the event of a default at the partnership level.

The cable systems within the affiliated companies generate more than enough cash flow to service the debt, he added.

"We believe that the concerns are exaggerated," Gupta wrote.

Nevertheless, Gupta lowered his 12-month price target on the stock from $37 to $30, and lowered his risk rating to "speculative" from "high." His overall rating on the stock remains a "buy."

Most said Adelphia's situation was unlikely to affect other MSOs, because its structure differs from the others.

"This is a Rigas issue," one analyst said.

Stocks in other MSOs were generally unaffected by the Adelphia news, with most showing declines of under $1 per share during the days between March 25 and March 28.

Concerns about the co-borrowings caused two major credit rating agencies to revise their outlooks on Adelphia debt.

Standard & Poor's placed Adelphia's "BBB"-rated debt on "credit watch" with negative implications, citing the co-borrowing agreements. A reasonable valuation of the 300,000 subscribers in the partnerships "may well fall short of the associated incremental debt," the rating agency added.

Moody's Investors Service placed about $19 billion in Adelphia debt on review for possible downgrade. It said that while the company was aware of the off-balance sheet partnerships, the sheer magnitude of the debt caught the credit agency off-guard.

Moody's vice president and senior analyst Russell Solomon said that he had estimated the debt level of the off-balance sheet entities to be between $1.3 billion and $1.5 billion, not $2.3 billion.

"The first question was, 'Were we surprised by this?' And the answer is, 'No,' " Solomon said. "But we were surprised at how quickly and how large the off-balance sheet obligation had grown, and most troublesome for us is what it had been used for."

Since last year's bankruptcy of Enron Corp. — the largest in U.S. history — investors have punished companies that have shown questionable accounting practices.

While no one is comparing Adelphia to Enron, the inability to explain what backs the debt obviously hurt the stock.

"They [Adelphia] didn't do anything illegal; it was just a bit underhanded," Solomon said.

Solomon said he would also look closely at Adelphia's Form 10-K annual report, but said the MSO might have to do more than just explain the situation better. It might have to sell off systems to eliminate the $2.3 billion in debt.

"They're going to have to do something," Solomon said. "They lost a lot of credibility in the marketplace."

Given average system valuations of about $4,000 per subscriber, Adelphia would have to sell systems with about 575,000 customers to raise $2.3 billion.

While the company has already said it would like to sell 700,000 subscribers in non-strategic markets, those systems have been on the block for more than a year and have not attracted any serious buyers.

In the March 27 conference call, Tim Rigas offered little information on the status of the sale.

"We have not made any progress. We're still looking at it," Rigas said. "We have made no decision not to sell."

The debt debacle marred what was otherwise a pretty good quarter for Adelphia, with digital subscriber growth in excess of past estimates and its debt leverage — once the highest in the cable industry — cut nearly in half.


Adelphia said that its debt at the end of December was about 6.3 times cash flow, versus 11 times at the end of 2000.

Cohen did not believe that the off-balance sheet revelation would present major problems for Adelphia, but added that the additional debt could affect the company's debt-to-cash flow ratio, a major benchmark in attracting additional borrowings and a major concern of bondholders.

"It's not going to take the company down," Cohen said. "But it is more leverage than people were aware of. Now they're aware of it."

He added that with $500 million in bank debt attributable to Adelphia Business Solutions Inc. — which is guaranteed by Adelphia Communications — the convertible note obligation and about $1 billion of the off-balance sheet debt, Adelphia's debt-to-cash flow ratio could be about 8 times instead of 6.3 times.

"My bottom line is that there is a quantifiable risk," Cohen said.