HealthSouth falls on more bad news; Hayes Lemmerz up; Delta shines amid lackluster airlines

By Carlise Newman

Chicago, March 24 - The distressed debt market was relatively active Monday, with HealthSouth Corp. still making waves. Hayes Lemmerz International Inc. rose moderately after the market digested the company's exit financing plans released late Friday. Airlines continued their tumultuous ride during the throes of war, with Delta Airlines hanging on to gains from Friday, but distressed names such as United Airlines and American Airlines skidded lower as recent events in Iraq indicated the war could last longer than many had assumed

HealthSouth was fairly active Monday, "initially a tad stronger but not anything gung-ho," said one trader - until more bad news hit the troubled provider of outpatient surgery, diagnostic imaging and rehabilitative healthcare services in mid- to late afternoon, leaving it down around a point on the day.

A distressed trader quoted the Birmingham, Ala. company's 7 5/8% bonds due 2012 about ½ to 1 point higher in early trade, bid at 45 and offered at 47, on news the company had brought in consultants to help turn around its dismal finances.

The company announced it hired Alvarez & Marsal Inc., a turnaround advisory firm, to help stabilize operations, address financial and liquidity concerns and to position the company for successful restructuring. The company also hired law firm Skadden, Arps, Slate, Meagher & Flom LLP to serve as lead coordinating counsel on corporate and litigation matters.

But later in the afternoon, HealthSouth's bonds fell two points from those highs, a trader said, quoting the 7 5/8% notes at 43 bid/45 offered, after the company announced that an independent director resigned. Betsy Atkins, a corporate governance specialist, had been appointed to the board on March 10, just over a week before the SEC filed charges against HealthSouth and its chief executive, Richard Scrushy.

The board of directors named director and real estate executive Jon Hanson to serve as interim chairman of the board's investigative committee.

HealthSouth's bank debt experienced a prolonged fall throughout the session, ending the day at 44 bid/46 offered, down about six points from 47.5 bid/48.5 offered late Friday.

"HealthSouth went south and it's going to keep heading in that direction," said a trader. "I think it's going to go down further. I can't see anything else happening. Who wants to finance that company?"

Banks froze the company's $1.25 billion credit facility last week after the SEC accused the company and its founder of inflating earnings by $1.4 billion since 1999 and overstating $800 million in assets.

The convertibles - now trading from distressed desks - were also lower.

HealthSouth's 3.25% convertibles that mature April 1 were seen trading in the mid-teens Monday, but closed at 19 bid, 19.5 asked, traders said.

"They (HealthSouth converts) were down about 4 to 4½ points from Friday and we were hearing that there are still buyers - mostly lawyers, firms that specialize in bankruptcy," said a convertible trader at one of the big firms.

Hayes Lemmerz saw some upside action Monday after news was released late Friday detailing its exit financing. Its bank debt was quoted at the "high-70s" after a closing price Friday of 76 bid 78/offered. The company announced it has received a commitment for up to $550 million from affiliates of Citigroup Inc. to support its reorganization plan. The financing will be used to pay $450 million to the company's senior creditors and to provide working capital for its ongoing operations.

Hayes Lemmerz is a Northville, Mich.-based auto parts maker. The company and its subsidiaries filed for Chapter 11 bankruptcy on Dec. 5, 2001.

The trading session would not be normal - at least for recent times - without a mention of airline activity.

After jumping Friday on lower oil prices and service reductions, the sector was in reverse Monday with the exception of Delta Airlines, which was seen up a few points after the company caught up with other major carriers and announced cuts to its flight schedule. A trader quoted its 7.70% notes due 2005 at 65 bid/67 offered, and its 9% notes due 2016 at 50 bid/52 offered.

Delta said its international schedule changes are effective April 6 and the domestic ones March 27. No job cuts were yet announced at Delta, which has only its pilots represented by a union and therefore has more flexibility than other airlines to lay off staff when necessary.

On Friday, Northwest Airlines Corp. announced plans to cut its flight schedule by 12% along with 4,900 jobs and UAL Corp.'s United Airlines announced it will cut its schedule by 8%. AMR Corp.'s American Airlines already announced it is cutting international schedules by 6%.

On Friday those announcements, in addition to news of quick U.S.-British advances into Southern Iraq, where most of that country's oil fields are located - which caused a tumble in crude oil prices - gave a lift to airline stocks. But on Monday, events in the war with Iraq in recent days proved that even in areas where American and British forces thought they had control, resistance continues to pop up, and airlines suffered. According to a distressed debt trader, only Delta was higher.

"Maybe Delta is up because it's the only one not bankrupt. We never know what's going on with airlines. The war will be longer, so airlines are up. Or they're down. The war will be shorter, so they're down or they're up. Maybe someone was short Delta. Maybe it was technical," said a distressed debt trader, ticking off the reasons why airlines have been all over the place. "The reality is, we just don't know."

He quoted AMR Corp.'s American Airlines 9% notes due 2016 at 22 bid/24 offered, down from Friday's closing price of 24 bid/25 offered.

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