HealthSouth's bonds fail to sustain rally; Conseco better on narrower loss for quarter

By Carlise Newman

Chicago, Aug. 15 - The honeymoon appeared to be over for HealthSouth Corp., whose bonds had rallied this week after the company announced it had paid $117 million in past-due interest under various borrowing agreements.

HealthSouth's 7 5/8% notes due 2012 dropped two points Friday, for a total of four points in two days, to 78 bid, 80 offered, a trader said.

HealthSouth said it paid all the overdue interest owing on its bank debt and notes, a total of $117 million. The Birmingham, Ala. company also said it has begun talks with holders of its 3.25% convertible subordinated debentures on an exchange offer. HealthSouth owes $344 million in principal on the convertibles, which matured on April 1.

HealthSouth said it was able to make the overdue interest payments due to improving liquidity from operations and asset sales. It also intents to make upcoming interest payments.

"It's going to be a nightmare," a trader said Thursday of HealthSouth's current situation. "If they can't make headway with the offer for the bonds and the company files for bankruptcy, the money is taken back. Investors are in the air. Should they trade without interest?"

"It's a clearance nightmare," he added.

After the interest payments were announced, the bonds started trading with accrued interest again after previously trading flat.

Late Thursday, HealthSouth told U.S. regulators it would not file its latest quarterly report on time because of an ongoing probe into its finances. HealthSouth in an SEC filing said it could not yet complete preparing its financial statements for the three months to June 30, 2003, because of the ongoing probe. It said it intends to file the 10-Q report "as soon as practicable."

Meanwhile, Conseco Inc. reported a narrower loss for the quarter Thursday. The loss was trimmed to $20.6 million from $1.33 billion a year ago. A trader said the report was "very strong" and said Conseco's move was "notable."

The unexchanged bonds rose to 39 bid, 41 offered from 36 bid, 38 offered Wednesday, while the exchanged bonds rose to 66 bid, 68 offered from 67 bid, 69 offered the previous session.

Conseco also said Thursday it has resolved a dispute with its former chief executive and current chairman Gary Wendt over financial obligation releases in its bankruptcy exit plan and now will seek court approval of the plan in early September.

WorldCom Inc.'s bonds, lively in recent weeks, were nearly unchanged Friday. The bonds were seen at 27 bid, 27 7/8 offered, rising about a ½ point from Thursday.

"There was a sudden flurry of activity in the afternoon, when rumors were out that FBI is looking to talk with the public on the rerouting," a trader said. He said the bonds fell to about 25 bid after the news.

Ashburn, Va.-based WorldCom announced monthly operating figures Thursday. During the month of June, WorldCom recorded $2.075 billion in revenue versus $2.034 billion in May 2003. Operating income in June was $146 million versus $116 million in May. The company had net income in June of $84 million compared to net income of $46 million in May.

"While the business environment remained highly competitive in June, we continued to make steady and solid progress executing against our plan of reorganization," said Bob Blakely, WorldCom's chief financial officer, in a news release. "Our customer loyalty remains strong and we are on track to emerge from Chapter 11."

DVI Inc. bonds were still in the picture Friday. The company announced late Wednesday night that it would file for Chapter 11 bankruptcy protection soon and that it has not secured debtor-in-possession financing.

Despite discussion with potential funding sources, DVI said it was unable to arrange for funding required to continue operations. Its attempts at a sale or recapitalization have been delayed by the discovery of possible improprieties in its prior dealings with lenders, allegedly involving misrepresentations regarding the amount and nature of collateral pledged to lenders. An investigation into the improprieties has begun by DVI's audit committee.

DVI bonds were seen at 16 bid, 17 offered, a drop of only a ½ point from Thursday. The bonds had fallen as much as 6 points this week.

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