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Debt Worries Hit Adelphia Phone Unit

Adelphia Communications Corp.'s competitive phone carrier unit took a tumble last week after Moody's Investors Service lowered its outlook on the telco's debt — and the MSO's — and warned that the subsidiary was running out of cash.

The rating agency assigned a negative outlook to a $2.5 billion bank credit facility for Adelphia Business Solutions Inc. just days after the competitive local-exchange carrier said it would need another $500 million to fund its business plan through June.

Officials at Adelphia Business Solutions, also called ABIZ, did not return phone calls for comment.

The move by Moody's prompted some equity analysts to downgrade their ratings for the stock. Merrill Lynch & Co. Inc. cut its rating on ABIZ to near-term "reduce" from near-term "neutral."

Moody's also expressed concern that ABIZ was running out of cash. According to ABIZ's most recent financial statement, it only had about $54 million of cash on hand.

"While ABIZ is still in the process of negotiating a new credit facility, it is reasonable to assume that the CLEC company is either out of money at present or will be shortly," Moody's said in a statement.

Moody's analysts said the downgrade reflects concerns about ABIZ's "large funding gap and immediate liquidity needs, along with our view that its business model may continue to be adversely impacted by the general economic slowdown and, in particular, the broad-based scaling back of its customer's telecommunications spending plans."

ABIZ shares went into a tailspin after the Moody's revision, losing 56 percent of their value in just two days. On Monday — the day of the ratings agency's announcement — ABIZ closed at $2.30, down $1.30. The slide continued on Tuesday, when shares fell 72 cents to $1.58.

The furor surrounding ABIZ over the last few days has been largely unwarranted, said Salomon Smith Barney Inc. high-yield cable analyst Stevyn Schutzman. Moody's change in outlook on ABIZ debt was due largely to the agency's decision to rate ABIZ on a consolidated basis with its MSO parent. That's something the other top ratings agency — Standard & Poor's — has been doing for quite some time, said Schutzman.

"I think it's pretty basic," Schutzman said. "S&P had consolidated Adelphia and ABIZ and Moody's did not. Now Moody's has decided to put them together and I think what pre-empted all of that was the fact that Adelphia was in the market with a bank deal.

"The Street has known that ABIZ was going to go out for between $300 million and $500 million for a long time," he added. "[Monday's] movement was indicative of the fact that, one, now they [Moody's] are looking at them as a single unit and, two, Moody's is saying is that they are no longer going to take promises, they want to see action."

Though Moody's expressed concern that Adelphia would wind up paying the tab for ABIZ as its need for cash grows, Schutzman said that's also been widely known for months.

"What I take away from that is if ABIZ runs out of money, guess who's going to be feeding it — Adelphia," Schutzman said. "That's always been the case. Adelphia is not going to walk away from that investment."

ABIZ has been a drain on Adelphia, but one the MSO has managed to weather. Earlier this year — even as some analysts expressed concern over the CLEC's increased funding needs — Adelphia reduced its capital expenditure budget for the unit from $675 million to between $475 million and $500 million.

The telecom unit also scaled down its expansion plans. It projected it would be in 80 markets by the end of the year, up from its existing 75. ABIZ had earlier planned to be in between 175 and 200 markets by the end of 2001.

"Adelphia made three promises in the beginning of the year: They were going to cut the business plan down at ABIZ, which they did; they were going to issue equity — they issued a truckload — and they were going to monetize some of their cable assets, which they have yet to do," Schutzman said. "I think the problem for Adelphia has been that for every dollar of equity capital they've raised, they only got 50 cents worth of recognition for it. If they follow through on those subscriber sales, they would have kept their promises."

Parent Adelphia was initially unaffected by Moody's downgrade of ABIZ: The MSO's stock rose 55 cents, to $33.51, last Monday. But Adelphia stock lost $1.05 last Tuesday, closing at $32.46.

"From my perspective, this is the only CLEC out there that I know of with a parent behind it that can support it," Schutzman said. "The parent has got a good stable, non-cyclical, recessionary [proof] business. That is good if you're ABIZ; it may or may not be good if you're Adelphia, from a bond perspective."