Battle Erupts Among Creditors Seeking Redress Over Adelphia
By KATE BERRY
Who will ultimately control Adelphia Communications Corp., the cable operator in the middle of Chapter 11 bankruptcy proceedings?
Investors may be riveted by the fraud trial underway in New York federal court involving John Rigas, Adelphia’s founder, and his sons Michael and Timothy. Yet the real battle for control of Adelphia, which provides service to part of L.A.’s lucrative cable market, is playing out in another venue: U.S. Bankruptcy Court in Manhattan.
Fighting has erupted among different creditor groups that are unhappy with the exit plan proposed last month by Adelphia’s new management team.
The plan sets a $17 billion valuation on Adelphia, the fifth-largest U.S. cable operator, and includes an $8.8 billion financing package from four major banks. Adelphia expects to emerge from bankruptcy in late 2004 or early 2005.
The plan has angered a group of banks that includes Bank of America Corp. and Citigroup Inc., which were responsible for lending the Rigas family more than $3 billion through various co-borrowing facilities.
Those borrowings ultimately led to Adelphia’s bankruptcy in June 2002. Adelphia is suing the banks, but they claim they are being penalized in bankruptcy court for allegedly taking part in the fraud.
David Friedman, a partner with Kasowitz Benson Torres & Friedman, represents the official committee of unsecured creditors. He conducted a yearlong investigation of the banks that included more than 1 million documents.
“There are many, many banks and many, many levels of culpability within the bank group,” Friedman said. “The company has given their best attempt to call the balls and strikes in a fair way.”
Under terms of Adelphia’s restructuring plan, the banks will be paid in full but they are unlikely to get their hands on their money anytime soon. The plan proposes setting up an escrow account that only could be tapped after lawsuits are resolved against the banks, the Rigas family, and Adelphia’s former auditor, Deloitte & Touche. Litigation could take two to three years.
In addition, other creditors would be allowed to recover money from the escrow accounts.
Bank of America and Citigroup, along with Bank of Montreal, Wachovia Bank, J.P. Morgan Chase and Deutsche Bank, have all objected to the plan. They claim senior creditors are trying to force them into a settlement agreement.
Bank of America lent about $2.5 billion to Adelphia’s Century Communications cable unit, which includes 1.1 million subscribers in Los Angeles. The bank claims in court papers that the plan is unfair, and the unit should be sold off separately.
“Bank of America is aware of other parties-in-interest who want to file a plan of reorganization,” the bank stated in court papers. “The current availability of funding for cable acquisitions provides an opportunity for a favorable sale (of Century).”
Jockeying among various creditors will continue until late April, when a hearing on the restructuring plan is scheduled. At that time, the equity committee and other creditors are expected to put forward their own exit plans, which could call for a sale of the company or some of its parts, such as the Los Angeles assets.
Shareholders, in particular, contend that the $17 billion valuation of Adelphia is too low and that a valuation of $20 billion to $22 billion would at least give them some recovery of their losses.
Friedman admits that Adelphia’s restructuring plan “generally is attractive to a lot of unsecured creditors,” which are slated to be paid 100 percent of their claims in cash, plus interest.
Most of the high-yield debt held by Adelphia’s various operating companies was purchased by pension funds and high-yield bond funds that expect to make as much as 124 percent on the dollar under the current plan.
Senior bondholders also will receive interest of up to 9.5 percent over the course of nearly three years.
Senior bondholders include W.R. Huff Asset Management, in Morristown, N.J., Appaloosa Management in Chatham, N.J., Franklin Advisors Inc., in San Mateo, Calif. and MacKay Shields LLC of New York, a subsidiary of New York Life.
Bill Huff, a low-profile financier who has become one of the most influential figures in the British cable market, is believed to be the largest single Adelphia bondholder, and W.R. Huff is expected to receive seats on Adelphia’s board.
However, there is no way of knowing the amount of senior bonds belonging to each shareholder.