HealthSouth bonds have a relapse; Nortel off on warning

By Paul Deckelman and Paul A. Harris

New York, Aug. 28 - HealthSouth Inc.'s bonds and shares were under the weather for a second straight session Wednesday, continuing to weaken in the wake of the company's Medicare reimbursement problems and the likely spinoff of its most profitable operations. Also on the downside, Nortel Networks Corp. bonds retreated after the telecommunications equipment provider warned that its sales would miss earlier forecasts, which prompted a warning of a possible downgrade from Moody's Investors Service.

In the primary market Del Monte Food Co. said it is planning a $300 million junk issue as part of the financing for its acquisition of some H.J. Heinz Co. businesses. And Swift & Co.'s deal was back in play although it was unclear whether it would still be the $400 million of notes lined up before the transaction was put on hold.

In secondary trading, HealthSouth was in retreat for a second consecutive session Wednesday. Its shares - which had plummeted 43.94% on Tuesday after the Birmingham, Ala.-based provider of outpatient surgery and rehabilitative services announced plans to split itself in two, and warned of lower earnings and discontinued guidance due to changes in Medicare reimbursements, - dropped another $1.66 (24.74%) Thursday, ending New York Stock Exchange dealings at $5.05. Volume was 42 million shares, about 12 times the usual turnover.

On the debt side, the company's bonds - which had swooned about 10 points on Tuesday in response to the news and warnings of possible downgrades in its debt ratings (senior unsecured at Ba1/BBB-) by both Moody's and Standard & Poor's - remained on the slide Wednesday.

"HealthSouth was the name" of the day a trader said, noting its continued backtracking. "A lot of people were focused on that," while another said they were "trading down, in 10-point ranges."

A distressed-debt trader estimated that the bonds were down about six points on Wednesday and 16 points over the past two sessions, pegging the company's 7 5/8% notes due 2012 at a wide 75 bid/80 offered.

Another trader said they "definitely" went even lower [than Tuesday's closing levels] in Wednesday's dealings, although he allowed that "there hasn't been that much trading; they've just kind of been drifting down, gapping and drifting lower."

He saw the company's 7 5/8% notes due 2012, which on Tuesday had fallen about 10 points to close at 84 bid/86 offered, ended dealings Wednesday offered at 82, with no bids seen.

"By [Wednesday] afternoon, they were all offered without a bid," the trader said. He quoted HealthSouth's 7% notes due 2004, which had declined 10 points Tuesday to 84, as having been offered at 81 Wednesday without any bids, while its 6 7/8% notes due 2005, which went out Tuesday offered at 85, ended Wednesday offered at 82, with no bids. "Again, there really wasn't much trading, but the offer levels just got lower and lower."

HealthSouth began its precipitous dive Tuesday after it warned that "unfavorable developments in outpatient therapy reimbursement" due to changes in the government's Medicare rules, will require that outpatient therapy services provided to two or more patients in a single time period be paid for under the "group therapy" payment code, whether or not such patients were engaged in the same activity. It warned that the new ruling will "significantly" lower reimbursement for services previously paid as individual therapy, and said that in an effort to shield its profitable network of freestanding outpatient surgery centers from uncertainty stemming from the new rules it would spin that part of its business off into a new public company - a development which both Moody's and S&P both noted with some wariness in their messages warning of possible upcoming ratings downgrades. HealthSouth itself will continue to operate its rehabilitation therapy centers, which will bear the full brunt of the government policy changes.

The company further warned that in light of its interpretation of the new rules its full-year EBITDA will likely come in around $175 million less than previous projections and it further cautioned that because of the uncertainties surrounding the full impact of these developments, which could render any kind of predictions meaningless, it would discontinue earnings guidance for the remainder of 2002 and for 2003.

HealthSouth said the new edict seems to contradict several other government regulations, and said it is seeking a clarification.

"It seems like people are still trying to figure out what it all means and make heads or tails of the whole situation," the trader agreed.

He also noted that among other companies which operate healthcare facilities of one sort or another that could be affected by the new Medicare guidelines, "there really isn't a lot of the stuff trading. There hasn't been much activity, just stuff being quoted down."

He saw little impact, for instance, on the bonds of HCA Inc., the Nashville, Tenn-based operator of hospitals and surgery centers. On the other hand, he saw Select Medical Corp.'s 9½% notes due 2009 having declined to 101 offered without any bids from Tuesday's closing bid levels at 102; at another desk, bids were seen on Select Medical's bonds, which were being quoted four points lower, around 98 bid. Other healthcare companies having an allergic reaction Wednesday included Fresenius Medical, which operates a network of kidney dialysis centers; its 7 7/8% notes due 2008 were quoted a point lower at 85 bid, while American Orthopedic Group's 10 3/8% notes due 2009 lost a point to end around 103. Matria Healthcare's 11% notes due 2008 were two points lower, at 87 bid.

Outside the healthcare sphere, the other name getting banged up was Nortel Networks, which warned that due to the continued slowdown in the telecommunications industry it now expects revenues from continuing operations in the third quarter to be as much as 10% lower than second quarter revenues; earlier, the Brampton, Ont.-based telecom equipment maker had projected that revenues would essentially be flat on a sequential basis.

Nortel said it would take actions to lower its breakeven costs, including further job reductions to bring its total workforce down to 35,000 by the time its belt-tightening is completed in the fourth quarter, about 7,000 persons less than currently and just one-third of what its workforce was back when the telecom boom was still going on, about two years ago.

Nortel's 6 1/8% notes due 2006, which had been in the lower 50s on Tuesday, pushed down to levels as low as 48 bid/50 offered on the news. Its shares lost 19 cents (15.45%) in NYSE dealings to end at $1.04.

After the close, Moody's put Nortel's ratings, including the Ba3 rating on its senior unsecured debt, on review for a possible downgrade. The agency noted that "capital spending in the telecommunications industry has declined precipitously over the past two years, initially in the emerging carrier segment, but has now expanded to the incumbent carriers. Moody's expects this condition to continue going forward creating continued weakness in Nortel's end markets. While recognizing the company's strong cost cutting efforts to date, its announcement [Tuesday] is evidence that further cost cutting is necessary in an attempt to achieve a cost structure that allows the company to return to profitability."

A trader saw the bonds of Nortel rival Lucent Technologies Inc. down around a point to 62.5 bid/64.5 offered.

Qwest Communications International Inc. shares jumped 24 cents (8.66%) to $3.01 on unconfirmed market rumors that the Denver-based regional Bell operating company might be nearing a deal with its banks to amend the terms of a $3.39 billion credit agreement. But a trader said that "the stock might have been up but the bonds were dead. No real trading took place. Whether it was the short end or the long end, levels were pretty much the same as going out [Tuesday] night. There was no real action [Wednesday], no bid. If anything, things were a touch softer."

Elsewhere in the telecom sector, Nextel Communications Inc. debt continued to firm, apparently on continued investor optimism about the prospects for wireless industry consolidation. Nextel's 9 3/8% notes due 2009, which on Tuesday had closed at 75 bid, pushed up to 77 Wednesday, while its 10.65% notes "really jumped," a trader said, quoting them Wednesday at 82.375 bid/81.625 offered, well up from Tuesday's 77 bid/79 offered. Given that Nextel's bonds had been trading as low as the mid-to-high 50s just a few weeks ago, he marveled "so we're seeing 80s on some Nextel paper, amazing, isn't it?"

Xerox Corp. bonds were also firmer on the session, its 9¾% notes due 2009 closing at 82 bid/85 offered, up from 80.5 bid/82.5 offered Tuesday. Its 5.5% notes due 2003 were a point-and-a-half better, at 87.5 bid.

Although sources in the high yield primary market had been speculating that Swift & Co. might have to wait until the cows come home to get its LBO-deal done in the wake of ConAgra's massive beef recall in July, a press release Wednesday has the transaction moo-ving onto the September forward calendar.

And sources confirmed Wednesday that Del Monte has $300 million of new junk in the can, however no one claimed to be familiar with the deal's ingredients, or when the lid would come off.

ConAgra Foods Inc. announced in a Wednesday press release that it expects Hicks, Muse, Tate & Furst Inc. and Booth Creek Management, Inc. to wrap up their financing and close the previously announced $1.4 billion leveraged buyout of Swift & Co. during September.

Prior to herding the bond deal off the roadshow on July 19, in the wake of ConAgra's voluntary recall of 18.6 million pounds of E. coli-tainted ground beef (reportedly the second-biggest beef recall in US history) the Swift & Co. deal appeared set as $400 million of seven-year senior notes (B1/B+) via Salomon Smith Barney and JP Morgan.

The bonds, along with a $550 million secured credit facility (Ba2/BB) led by Citibank and JPMorgan Chase, are slated to finance the acquisition of 54% of ConAgra Foods' US and Australian beef, pork and lamb operations by the sponsors.

Sources told Prospect News on Wednesday that the deal is definitely coming back, however the one that eventually comes through the chute may appear slightly different from the one that Swift had on the road in July.

"I don't know if it will be $400 million," one sell-side source said Wednesday. "After the E. coli-thing I heard Hicks Muse went back to renegotiate the purchase price."

San Francisco processed food company Del Monte Food Co. is coming with $300 million of notes, according to a filing with the US Securities and Exchange Commission. However market sources claimed Wednesday that while Del Monte is known to be coming to market very little is presently know regarding what exactly is in the can.

The company is also doing a $1.6 billion credit facility via Bank of America, JPMorgan Chase, UBS Warburg and Morgan Stanley.

Proceeds will be used to finance the merger with certain H.J. Heinz Co. businesses.

Other than the promise of those two deals the primary market bided its time, Wednesday.

"I think we're not going to hear anything until after Labor Day," one sell-sider offered Wednesday afternoon. "But it should be pretty big after that. You've got those euro LBOs. (Brake Bros. and Legrand - see Prospect High Yield Daily forward calendar)

"You've also got the QwestDex deal, and you'll probably have a Sprint yellow pages deal later on.

"People are really focusing on the QwestDex deal to be the indicator," the sell-side source added, alluding to a deal for up to $1 billion (although most are saying slightly less) of new junk bonds to fund the LBO by Carlyle Group and Welch, Carson, Anderson & Stowe of the Denver telecom's yellow pages operations.

Banc of America Securities, Deutsche Banc Securities, JP Morgan, Lehman Brothers and Wachovia Securities are running the books on the QwestDex deal which is expected to be mid-October business.

However, this source added, with the possible exception of the above-mentioned euro deals, it remains uncertain what the primary market will look like post-Labor Day.

Given the current bear market and 11 consecutive outflows from the high-yield mutual funds that, according to sources, total approximately $2.5 billion, it will be interesting, one sell-sider said, to see how the buy-side turns out for the first deals.

Given those outflows, Prospect News inquired of its sell side sources Wednesday, how full do the buy-side's wallets figure to be?

"They still have a lot of cash," one official offered. "August is supposed to be a really strong month in terms of coupons."

Another said: "I think the accounts have cash.

"I don't think it's as great as it was, but I think there's liquidity out there.

"It just has to be the right story. People aren't going to buy just anything."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.