Adelphia softer after big auction; Lucent unchanged after downgrades, earnings warning

By Sara Rosenberg

New York, Sept. 13 - A day after the headline-making, eye-catching auction of Adelphia Communications Corp.'s bank debt quotes remained relatively unchanged, however, the feeling around the bank debt was softer, according to market sources. Meanwhile, Lucent Technologies Inc.'s bank debt was able to hold its head up high as secondary levels remained intact despite anticipated poor fourth quarter results and rating downgrades.

Adelphia paper strengthened slightly on Thursday in response to a $100 million auction of its bank debt. However, the company's loans were said to feel weaker on Friday even though prices, according to one trader, remained at basically the same levels with the TCI paper bid at 84½ and offered at 851/2, the Century Communications paper bid around 68 and offered around 69 and the FrontierVision paper quoted around 861/2.

"The prices firmed up a little after the auction [on Thursday]," a trader said. "Before that, the paper was just kind of hanging out there."

On Friday, the bank debt felt "a little softer", a second trader said. "The auction went off very aggressively. Dealers probably got stuck with some paper," he explained.

The weaker tone was reaffirmed by a third trader who explained: "When that much paper comes out it puts pressure on."

The seller in the auction was identified as "a single institutional lender," one source previously told Prospect News. Another source got into specifics, saying the firm involved was Mellon Financial Corp. The institution was not immediately available to confirm or comment on the identification.

Lucent's debt remained at previous levels with a bid of 92 and an offer of 94 on Friday, despite negative fourth quarter news. The Murray Hill, N.J. communications equipment company's stock was not as lucky, plummeting $0.39 or 23.64% to $1.26 at market close.

"[The bank debt] didn't drop," a sell-side source told Prospect News. "People think the liquidity is strong enough."

The company said it anticipates fourth quarter revenues will decline by approximately 20% to 25% from the $2.95 billion recorded in the previous quarter "due to continuing market softness and ongoing uncertainty in customer spending levels, particularly in North America." A pro forma loss per share of about $0.45 is expected in the fourth quarter "as a result of the sequential revenue decline, charges associated with a significant customer financing default this month, and the inability to recognize tax benefits on losses," the company said.

Most important to bank loan participants, though, was the company's statement that financial covenants under the credit agreement are expected to be met during the quarter and there is currently no outstanding balance under the existing credit facility.

In reaction to the disheartening fourth quarter predictions Standard & Poor's downgraded Lucent's ratings and maintained a negative outlook. Ratings lowered included the $2 billion 364-day secured revolving credit facility due 2002 and the $2 billion 5-year secured revolving credit facility due 2006, both cut to B from B+.

S&P added that the negative outlook reflects its belief that Lucent's plans to return to net profitability by the September 2003 quarter may not be achieved in light of accelerating marketplace stresses.

Fitch joined the party and downgraded Lucent's senior unsecured debt to B- from B+, the senior secured credit facility to B from BB- and convertible preferred stock and trust preferred to CCC- from CCC+. Once again, the rating outlook remains negative.

The company's financial flexibility is strained "despite a recent amendment to its $1.5 billion bank credit facility which provides minimal additional room for operational shortfalls as quarterly minimum consolidated operating EBITDA levels have been reduced significantly," Fitch explained. "Lucent expects to be in compliance with covenants for the fourth fiscal quarter but this facility, which expires in February 2003, will have to be renegotiated."

Moody's Investors Service held back from modifying ratings. Instead, the rating agency put Lucent on review for possible downgrade, affecting $5 billion of securities including its senior unsecured debt at B2, trust preferred stock at Caa1 and preferred stock at Caa2.

While the company expects to be in compliance with the covenants in its undrawn $1.5 billion credit facility at the end of this quarter, the weakened performance puts pressure on the company's ability to continue to comply with the bank agreement terms, Moody's said. Like Fitch, the rating agency noted that the facility matures in February 2003 and will need to be renegotiated.

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