HealthSouth falls on bank lenders' default notice; Worldcom stays on the upside

By Carlise Newman

Chicago, March 27 - Distressed trading Thursday mirrored Wednesday to some extent, with big newsmakers such as HealthSouth Corp., Fleming Cos., Inc. and Worldcom Inc. looming in the markets. In addition, NRG Energy Inc. was seen rising again Thursday while Mirant Corp. weakened slightly after a ratings downgrade.

HealthSouth said its lenders notified the company that it is in default under its $1.25 billion credit facility and that it is forbidden from making payments to noteholders. The company received notice that its lenders have determined the federal investigations into its financial reporting are a material adverse effect under the terms of the credit facility and that HealthSouth is in default.

As a result of the default, which is not a payment default, JPMorgan Chase Bank, the administrative agent under the facility, has notified the company that it is currently prohibited from making the $17.2 million interest payment to holders of its 10.75% senior subordinated notes and the $349.8 million payment of principal and interest to holders of its 3.25% convertible subordinated debentures, both due on April 1.

HealthSouth, which provides diagnostic, outpatient surgery and rehabilitation services, is accused of overstating profit by $1.4 billion since 1999 and assets by $800 million.

The Birmingham, Ala. -based company also said on Thursday it fired its chief financial officer, William Owens, who has pleaded guilty to fraud and has agreed to cooperate with prosecutors. Owens, however, will remain on the board.

HealthSouth's bonds were seen getting beaten down about 3 or 4 points, according to a distressed trader, leaving the company's 7 5/8% notes due 2012 at 45 bid/48 offered. Another desk saw the bonds at 44 bid/46 offered, compared to Wednesday's close of 47 bid/49 offered.

"They might move a point or two higher once in a while but the reality is, this company is in dire straits," said a trader.

The convertibles traded as low as 10.5 before closing the day at 11.5 bid, 12.5 asked.

The company's bank debt was another story. It was quoted everywhere from the mid-50s to the low 70s. LoanX quoted HealthSouth's bank debt at 58 bid/65 offer which reflected the varying desk quotes. Ultimately, one desk pinned down the bank debt at 61 bid/63 offered, much higher from levels in the mid-40s earlier in the week.

A distressed trader attributed the vastly wide range in prices - and some of the appeal of the paper - to the fact that HealthSouth has a largely unfunded revolver. As of Sept. 30, 2002, the company had drawn $150 million from its $1.25 billion facility, according to a filing with the SEC, but reports last week said the company had drawn about $300 million.

"It's pretty unclear; people are trying to find out where the levels are," said the trader.

Worldcom continued to dominate trade Thursday, pulsing a bit higher again after posting a rise in net profits Wednesday. WorldCom said sales in January fell to $2.16 billion from $2.2 billion in December 2002, but its net profit was $155 million compared with a net loss of $580 million the previous month, and the first monthly gain since it declared bankruptcy last July. The Clinton, Miss.-based telecommunications company's sales have been sliding downward since its Chapter 11 bankruptcy filing in July, when it had $2.46 billion in monthly sales.

Worldcom's bonds traded in the range of 25 to 26, a point higher than Wednesday, according to a distressed trader.

On a negative note, Fleming's bonds were said to be "hit" by one trader and "slammed" by another. The company's 10 1/8% senior notes were seen down 4 points at 27 bid/29.5, and its 9¼% seniors due 2010 also down 3 points at 28 bid/30 offered.

There hasn't been fresh news on Fleming since Tuesday, when a bankruptcy court judge on approved a settlement between Kmart Corp. and Fleming that slashed Fleming's $1.5 billion claim in the retailer's bankruptcy case to $385 million. But, traders said bankruptcy rumors, "while not necessarily strengthening, haven't evaporated."

Fleming, a wholesale food distributor based in Lewisville, Texas, provided groceries and related supplies to Kmart stores

In other news, energy companies remained relatively active. On Wednesday, the Federal Energy Regulatory Commission determined that there had been widespread manipulation of California's electricity and natural gas markets during the state's energy crisis of 2000 to 2001, upholding an earlier ruling by an administrative law judge. However, the commissioners didn't specify how much more the state is owed, saying this amount will be determined over the coming months.

The ruling prompted, in part, a downgrade of Mirant Corp. by Moody's Investor Service. Moody's cut Mirant's unsecured debt to Caa2 from B1 and the senior implied rating to B3 from Ba3. Moody's said the downgrade reflected, among other things, the expectation that future renewals of existing bank debt will be done on a secured basis, effectively subordinating the senior unsecured bonds. Moody's added that there is continuing uncertainty surrounding the company's debt obligations, and the potential liabilities that could result from the government investigations and lawsuits related to California's power markets.

A trader quoted Mirant Corp.'s 7 5/8% notes due 2006 a point lower at 52.5 bid/54.5 offered.

But a market observer who saw the Houston-based merchant energy firm's 7.20% notes due 2008 unchanged at 50.5 bid/51 offered despite the downgrade Wednesday opined that perhaps investors were fearing an even larger ratings cut, and reacted with relief when Mirant wasn't downgraded as much as they had expected.

However, NRG Energy bonds remained strong. A trader quoted the company's 8¼% senior notes due 2010 at to 37 bid/38 offered, up from 34 bid/36 offered Wednesday.

"NRG is up about 7 or 8 points in the last few days," said the trader.

NRG surged after Minneapolis-based Xcel said Wednesday that its board has approved a tentative $752 million settlement with the creditors of NRG, Xcel's troubled power generation and trading unit. The settlement calls for Xcel to make payments totaling up to $752 million to NRG over the next 13 months for the benefit of NRG's creditors, in partial consideration for their waiver of any claims against Xcel.

CORRECTION: In Wednesday's distressed debt commentary, trading levels for Hayes-Lemmerz International Inc.'s bank debt were quoted incorrectly. Hayes-Lemmerz traded in the high 70s Wednesday and remained bid at those levels Thursday.

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