American credit market outlook

As top Rigas family members are convicted of fraud at bankrupt cable operator Adelphia Communications, credit investors are paying more attention to the company most likely to be buying Adelphia's alluring assets: Time Warner Inc.
While other suitors are lurking, including Comcast and Cox Communications, analysts and traders said Time Warner seems the most likely candidate. Adelphia's 5.4 million subscribers are viewed as a very attractive opportunity for any buyer, as cable operators bundle more and more services together for subscribers, including Internet telephone.
"It's a great asset and strategically a great move," said Marion Boucher-Soper, director of high-grade research at Deutsche Bank Securities, of a possible Time Warner acquisition.
Boucher-Soper said Cox Communications could not be entirely ruled out of the bidding for Adelphia, which has been valued at $20 billion by some estimates, but that Cox has not "seemed as aggressive" in pursuing Adelphia.
A Time Warner purchase would also allow it to swap some of the Adelphia assets to Comcast Communications to settle Comcast's current stake and partnerships with Time Warner, valued at $5.5 billion.
For that reason, Fitch Ratings said in a report this week that "Time Warner would be the most likely acquirer," but that it would lead to much swapping of cable assets among the other major cable providers - Comcast, Cox and Charter.
In recent weeks Time Warner's credit spreads have widened in anticipation of a purchase that may involve burning cash or issuing more debt to finance the transaction.
In the credit derivatives market, the five-year spread of Time Warner's credit default swaps are trading around 83 basis points, at the wide end of its recent range. That means it costs $83,000 a year for $10 million of default protection.
But some analysts, like Boucher-Soper at Deutsche, said an Adelphia acquisition by Time Warner may not be so damaging to the balance sheet, calling it a "hiccup" that would offer "more good than bad here."
What will be important is how much cash Time Warner uses. At the end of March Time Warner had $5.9 billion on cash on hand, nearly double the amount from a year earlier.
One possibility that would limit the amount of cash used to fund the purchase would be a so-called "reverse merger," Boucher-Soper said. In a reverse merger, Time Warner would merge its cable units with Adelphia's to create a new entity and then use Adelphia's stock to fund the transaction.
An SEC investigation into Time Warner Cable prevents that subsidiary from doing an initial public stock offering to fund any purchase.
Time Warner has already made big efforts to clean up its balance sheet by reducing debt, generating more free cash flow and boosting its cash on hand. Time Warner has nearly $27 billion of debt outstanding.
Fitch also said in the report that Time Warner could finance an Adelphia purchase "in a manner to maintain" the current BBB-plus credit rating, or just one notch lower at triple-B.
But one unknown for Time Warner's outlook is whether it would consider buying MGM's film assets in addition to a possible Adelphia purchase. Such a move would be negative for Time Warner's credit spreads and possibly its credit ratings, traders and analysts said.