Adelphia Communications Corp.’s Bankruptcy Harvard Case Solution & Analysis

 Adelphia Communications Corp.’s Bankruptcy Case Solution

Introduction& Problem Identification

Adelphia Company was founded in 1972. The company achieved significant growth through several acquisitions and becamethe sixth largest cable operator in US by serving more than 5 million subscribers. Owners of the company have effective control by holding majority of the shares. It is expected that the company is highly geared and finance most of acquisitions through debt financing.
In the year 2002, the company committed a fraud and it was expected that it was the 11th largest fraud scandal in the history.The company uses several techniques and exploits accounting loop holes in order to improve its financial position. It is expected that company has different option available in order to deal with the problem. The company has both stock and cash options available from various companies in order to recover from financial distress that company is facing after facing the fraud scandal.

Reasons behind the Financial Distress

It is expected that the company is facing this financial distress due to several reasons however,there are some critical issues, which results in this financial distress lack. The company is not practicing accounting code of conducts and management of the company is not following transparency procedures.
It is expected that all family members are the members of the board.Moreover,the friends of the owners also got significant positions in the board, which results in biasness in decision making with respect to the performance of the executives and company like approval of the further debt financing despite of being highly leveraged affects the capital structure of the company.Furthermore, the company is not following the principles of corporate governance, which also strengthens the distress that the company is facing due to poor management.

Response from Lenders

The lenders of the company placed significant covenants and pursue to not lend in these as the leverage ratio of the company is increasing continuously and the company is planning to borrow further debt instead of decreasing gearing ratio.
Arguments with respect to Rigases’ defense

It is expected that the company’s owner holds most of the equity and he is using the company’s account for itsbenefits. Most of the personal expenses are paid through the company’s account which most analysts considered the reason of the current problem. It is not the only reason of the financial distress as the company is not following the principles of corporate governance and not practicing the accounting code of conduct. Moreover, there is no long term planning and most of the decisions for acquisitions go wrong, which results infinancial distress. In addition to this, lack of transparency procedures from the management of the company creates further problem for the business.

Co-Borrowing Arrangement

It is expected that the company is facing the 11th largest fraud scandal in the history of US, which occurred due to several reasons but arranging co borrowing and not disclosing the debt of 2.3 million dollars in the financials of the company plays an important role in creating the financial distress for the company.

Purchases of Stock through Co-Borrowing arrangement

In order to keep the control,the owners of the company purchase own stock through co-borrowing arrangement, which increases their holding. It is expected that purchasing own stock through co-borrowing dilutes the share price and it affects the financials of the company, which shows that there was no clear guideline with respect to the future against stock repurchasing.
Pay-off Structure

In order to borrow money, the company uses LEPPs, arrangement which results in leveraged of sponsoring companies. It is expect that there was no guarantee and treasury shares were heldby the lenders, which means that there was no collateral provide with respect to LEPPs which resulted in the partial release of collateral shares....................

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