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to be offered to subscribers. Of course, it also required cable companies to make signif-
icant new capital investments.
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Internet Access




Adelphia Communications Corporation
Cable modems enabled operators to deliver high speed access to the Internet and other
on-line services using their existing cable infrastructure. This cable data service would
be available at speeds up to 300 times faster than that available from 28.8 kilobit-per-
second telephone modems. Although this service would require users to have a computer
equipped with an ethernet card and an adjunct cable modem, it did not use the phone
line, required no log-on, and permitted connections to multiple services simultaneously.


ADELPHIA COMMUNICATIONS CORPORATION
John J. Rigas, the current chairman, president, chief executive of¬cer and majority
stockholder of Adelphia, was one of the earliest pioneers in cable television, creating his
¬rst system in Coudersport, Pennsylvania in 1952. Since then Adelphia had grown
steadily by acquiring and developing municipal cable television franchises. In 1986 the
company made an initial public offering to raise new external equity capital, although
the company remained ¬rmly in the control of the Rigas Family. Stock price perfor-
mance of Adelphia is reported in Exhibit 2.
Adelphia™s cable systems were organized into seven regional clusters: Western New
York, Virginia, Western Pennsylvania, New England, Eastern Pennsylvania, Ohio, and
Coastal New Jersey. Further details on these clusters are provided in Exhibit 3. The clus-
ters were located primarily in suburban areas of large and medium-sized cities within the
50 largest television markets. Adelphia also created an eighth regional cluster in South-
eastern Florida as a result of a joint venture with Olympus Communications, L.P. Adel-
phia owned 50 percent of Olympus and was the managing general partner.
From 1992 to 1996 Adelphia™s subscriber base grew from 1.4 million to 2.0. Seventy-
¬ve percent of this growth was generated from acquisitions and the remaining 25 percent
was from internal growth. As reported in Adelphia™s ¬nancial statements, shown in Ex-
hibit 4, the company™s revenues and EBITDA also grew signi¬cantly in this period. Rev-
enues grew on average 12 percent per year to $403 million, and EBITDA grew by an
average of 9 percent per year to $247 million.
Adelphia planned to provide expanded local telephone services to its subscribers
through its subsidiary, Hyperion Telecommunications, Inc. Management anticipated
that the Telecommunications Act of 1996 would expand the market opportunities for
Hyperion by removing legal barriers to entering local telephone markets. In the markets
where Hyperion™s networks were currently operating or were under construction, the
market opportunity was estimated to be approximately $4.8 billion, substantially all of
which was currently provided by the incumbent local exchange carrier.
Like many of the major cable operators, Adelphia had begun upgrading the technical
capabilities of its cable plant. All of the ¬rm™s current systems had a minimum 35-chan-
nel capacity and were capable of delivering one-way data transmission and digital video
services. In addition, over 94 percent of its subscribers could receive pay-per-view
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Credit Analysis and Distress Prediction




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programming. However, in most of its recent upgrades, Adelphia had used ¬ber optic
Adelphia Communications Corporation




cable as an alternative to the formerly used coaxial cable. Fiber optic cable provided in-
creased reliability, improved bandwidth, and easier implementation of two-way data
transmission. This would allow the Company to offer additional video programming ser-
vices, and to meet transmission requirements for high-de¬nition television, digital tele-
vision, high-speed data on the Internet, and telephone services. Exhibit 5 summarizes
the status of the ¬rm™s cable plant as of March 31, 1996.


The Lending Decision
Much of Adelphia™s external subscriber acquisition and cable replacement had been ¬-
nanced with debt. As a result, Adelphia™s ratio of debt to assets in 1996 was 1.85. Despite
this high leverage, management expected that it would need additional debt ¬nancing to
continue upgrading its cable technology. Management forecasted that capital expendi-
tures in 1997 would be somewhat higher than the $100 million outlay for 1996. To en-
sure that it had the ¬nancial resources to meet these outlays the ¬rm applied to a major
bank for a $690 million ¬nancing arrangement, consisting of a $540 million revolving
credit facility to mature December 31, 2003 and a $150 million term loan facility matur-
ing December 31, 2004. The ¬rm proposed using $480 million of the revolving credit
facility to repay existing bank loans, and the remainder for new plant upgrades.
Interest rates on Adelphia™s existing bank loans had been based on either the Euro-
dollar rate, the prime rate, or the Federal funds rate. On top of these base rates the banks
had charged a margin of from 0.5 to 2.5 percent depending upon Adelphia™s senior
funded debt ratio. Interest on current revolving credit agreements were set at either
prime plus 0 to 1.5 percent, the certi¬cate of deposit rate plus 1.25 to 2.75 percent, or
the LIBOR rate plus 1 to 2.5 percent. The weighted average interest rate on notes payable
to banks and institutions at March 31, 1996, was 8.36 percent.
The ¬rm™s existing revolving credit agreement provided for collateral against the
company™s investments and in some cases its cable assets. These agreements also re-
quired Adelphia and its subsidiaries to maintain certain ¬nancial ratios and limited the
¬rm™s additional borrowings, investments, transactions with af¬liates and other subsid-
iaries, and the payment of dividends by the subsidiaries.
After reviewing the industry and Adelphia™s ¬nancial performance, Sarah Kim was
unsure whether she should approve the loan request. The cable business seemed to be at
a turning point in its history, and Adelphia was one of the weaker ¬rms in the industry.
If she did decide to approve the ¬rm™s request, Sarah would have to make a recommen-
dation on how the loan should be structured, on the interest rate the bank should charge,
and on the covenants that should be built into the loan agreement.
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QUESTIONS




Adelphia Communications Corporation
1. Evaluate Adelphia™s business strategy. What are the company™s key business risks?
2. Do you think the company™s financial strategy is appropriate, given its business?
3. Given the changes in the cable industry, is the company™s financing strategy still ap-
propriate?
4. Should Sarah Kim grant the loan to Adelphia? What would be the appropriate terms
(in terms of interest rate, covenants, other security requirements)?
5. What financing options should Adelphia pursue if the bank does not grant the loan?
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Credit Analysis and Distress Prediction




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EXHIBIT 1
Adelphia Communications Corporation




Performance of Major U.S. Cable Companies

Capital Interest
Twelve Months Ending EBITDA Outlays Expense Debt to Subscribers
June 30, 1996: (millions) (millions) (millions) EBITDA (millions)
TCI $2,111 $1,957 $1,053 6.3 14.5
Time Warner 1,480 1,700 1,562 6.7 11.8
Continental Cablevision 717 599 431 7.8 4.2
Comcast 1,105 567 542 6.5 4.2
Cox Communications 542 484 133 4.8 3.2
Cablevision Systems 436 346 350 6.4 2.7
Source: Salomon Bros., Business Week..




EXHIBIT 2
Adelphia Communications Corporation Stock Price Performance,
March 1993 to March 1996
200


150
Price index




Adelphia Return
100
S&P 500 Index
Return
50


0
Mar-93

Jun-93

Sep-93

Dec-93

Mar-94

Jun-94

Sep-94

Dec-94

Mar-95

Jun-95

Sep-95

Dec-95

Mar-96




Source: Bloomberg.
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EXHIBIT 3




Adelphia Communications Corporation
Adelphia Communications Corporation, Summary of Subscriber Data as of March 31,
1996

Premium
Homes Penetration as
Passed Basic Basic Premium % of Total
in District Subscribers Penetration Units Subscribers
Western New York 368,071 254,121 69.0% 148,814 58.6%
New England 260,542 183,819 70.6 108,517 59.0
Virginia 336,261 245,748 73.1 111,245 45.3
Western Pennsylvania 252,013 184,291 73.1 72,488 39.3
Ohio 168,332 121,960 72.5 66,131 54.2
Coastal New Jersey 125,646 98,304 78.2 53,917 54.9
Eastern Pennsylvania 159,872 113,016 70.7 83,854 74.2
Southeastern Florida 808,683 551,377 68.2 237,842 43.1
2,479,420 1,752,636 Avg. 70.7% 882,808 Avg. 50.4%

Source: Adelphia Communications Corporation 10-K.
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EXHIBIT 4
Adelphia Communications Corporation


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