HealthSouth jumps on interest payment; Reliant Resources slides on earnings

By Paul Deckelman and Sara Rosenberg

New York, Aug. 12 - News that troubled HealthSouth Corp. has paid all of its past due interest and intends to make its upcoming interest payments as well sparked a solid rise in the Birmingham, Ala.-based medical services company's bonds, bank debt and shares Tuesday, traders said. Meantime, Reliant Resources Inc. debt was headed in the opposite direction after the Houston-based energy company posted a second-quarter loss and lowered its 2003 guidance.

HealthSouth's bank debt climbed into the high 80s from the low-to-mid 80s previously on the interest-payment announcement, while its bonds likewise improved solidly. A distressed-debt trader said that HealthSouth paying the $117 million it owed its bondholders and assuring them that it will make its future interest payments "was big news" on a day that otherwise saw not much activity.

Another distressed-debt trader saw the company's bonds "up a couple of points," quoting its senior bonds, such as its 8 3/8% notes due 2011 at 83.5 bid, 85.5 offered, "up a couple," and its subordinated 10¾% notes due 2008 six points better, at 82 bid,84 offered.

He also saw the company's convertibles up, quoting them at 84 bid, up from 75 bid previously; in addition to announcing the past-due interest payment and promising to make future payments, HealthSouth said that it has begun talks with the holders of its $344 million principal amount of 3¼% convertible subordinated debentures, which matured on April 1, on an exchange offer for those converts.

Details of the proposed exchange were not revealed and a call to the company was not returned.

And convertible holders said they found little clarity in the company's news release.

But in general, close observers expect the company to offer longer dated paper with perhaps a boost to the principal, along with a fatter coupon and, of course, a new conversion price.

A brokerage source close to the situation said it was still unclear as to how the accrued interest on the convertible will be calculated, since the principal amount may be increased and the new notes are expected to have a bigger coupon.

In any event, the source said the new notes are anticipated to have a long maturity date, adding: "I'd be surprised if it's as short as three years."

At another desk, a trader quoted the converts at 82.5 bid, up from 75 earlier, and the senior bonds at 83 bid, 85 offered, with all of the bonds now trading with accrued interest (they had previously been trading flat, or without the accrued interest). Clearly, he said, HealthSouth "was the big mover of the day."

It was also a major mover on the equity side, with its over-the-counter pink-sheet-listed shares jumping 60 cents (36.36%) to $2.25, on heavy volume of 31.6 million.

HealthSouth has been a troubled name for some months, bedeviled by allegations that it had inflated earnings by as much as $2.5 billion over the last several years.

The ongoing federal probes of the provider of diagnostic imaging and outpatient surgery and rehabilitative services resulted in the indictment and guilty pleas of a number of former executives, caused its stock to be delisted, drove its bonds down to deeply distressed levels from prior levels around par, and spurred speculation that the company might have to seek bankruptcy protection from its creditors in order to straighten out its finances - an option that HealthSouth has steadfastly said it would not pursue.

The payment of the overdue interest and the company's moves to resolve the overdue convertible situation are seen by observers as steps in helping to move it away from the possible Chapter 11 filing debt market participants have been talking about.

HealthSouth said in its news release announcing the interest payment that it was able to make the $117 million past due payment due to improving liquidity from operations and asset sales.

"With these interest payments, we have fulfilled not only a legal but also a moral obligation to our bank lenders and noteholders," said interim chairman Joel C. Gordon, who replaced ousted company founder and long-time chief Richard Scrushy several months ago. Scrushy's tenure at the top - including his efforts to diversify HealthSouth's activities into non-medical areas such as entertainment - is currently under federal scrutiny, although he has not been formally charged with anything.

Gordon added that thanks to the support of the company's noteholders and bank lenders, "in just five months, we have been able to strengthen and improve our liquidity while protecting and supporting our core clinical and patient operations."

Elsewhere, Reliant Resources's debt and shares nosedived following the company's release of disappointing second quarter numbers. Although the company did reveal a plan for cost reduction, market participants were underwhelmed, instead focusing mainly on the net losses.

The company's bank debt was quoted at 86 bid, 88 offered by the end of the day, down from prior levels around 90 bid, 91 offered, according to a bank-debt trader.

"The bonds fell a lot more than that, so it's not so bad," the trader added.

Indeed, Reliant's 9½% notes due 2013 were quoted down nearly eight points on the session, at 86 bid.

A market observer, confirming that level, opined that Reliant's bonds "were all over the place."

A bond trader agreed that the Reliant bonds "got hit hard," pegging them at 84 bid, 86 offered going home, down from morning levels he saw around 89 bid, 90 offered.

Reliant's 5% convertible due 2010 fell 16.25 points on the day to 72 bid, 72.5 offered.

On the stock side, Reliant's New York Stock Exchange-traded shares swooned $1.10 (22.09%) to close at $3.88, on volume of 29.1 million shares - nearly 12 times the usual 2.5 million-share handle.

For the quarter, Reliant reported a loss from continuing operations of $28 million, or nine cents per share, versus a year-earlier profit of $122 million, or $42 cents per share.

Reliant's loss in the latest quarter was attributed primarily to reduced earnings from the company's retail segment, weak wholesale earnings, and an increase in interest expense and amortization of financing costs associated with its $5.9 billion refinancing on March 31.

For the first six months of 2003, Reliant reported a loss from continuing operations of $74 million (25 cents per share), versus year-ago continuing operations income of $203 million (70 cents) per share.

This loss, besides reflecting the abovementioned factors, also reflected weaker results from the wholesale segment in the first quarter compared to the same period in 2002, and increased interest expense.

In addition to the second quarter numbers, the company announced a cost-reduction plan, which is intended to reduce annual operating expenses by approximately $140 million. Reliant expects to implement the plan during the second half of 2003.

But investors apparently looked past that turnaround prescription to the expected bottom line - Reliant said that for 2003 as a whole, it sees adjusted earnings of 10 cents per share - well below the 58 cents per share earnings that Wall Street has been anticipating.

Among other distressed issues, WestPoint Stevens Inc.'s 7 7/8% notes due 2008 were quoted more than a point lower, at 23 bid. Collins & Aikman Products Co, Inc., whose 11½% notes due 2006 had collapsed more than seven points Monday to 69 bid, had partly recovered some of the loss on Tuesday, as the notes gained a point to get back to 70. A distressed-debt trader saw its 10 ¾% notes having climbed back a little to 83 bid.84 offered. The Troy, Mich.-based automotovie components maker announced Monday that Jerry Mosingo had resigned as president, chief executive officer and a director of the company after only a year on the job, with chairman David Stockman - U.S. budget director during the Reagan Administration - taking over as CEO. It was the second management shakeup in as many years for the company. On Tuesday, the company further said that it had rescheduled its webcast and conference call about its second-quarter results for Thursday at 3 p.m. ET. Its results are scheduled to be released earlier that day.

(Ronda Fears contributed to this report.)

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