S&P cuts HealthSouth again

Standard & Poor’s said emerging details of the massive criminal fraud case against HealthSouth Corp. suggest the possibility of a default on its 3.25% convertibles, and lowered its senior debt to CCC- from B-. Subordinated debt was cut to CC form CCC.

Also, the ratings remain on negative watch.

HealthSouth’s former chief financial officer, chief executive officer, another senior officer and others are charged with falsifying financial entries that led to the overstatement of cash by more than $300 million in second quarter 2002. The former CFO has agreed to plead guilty.

These recent events raise concern that the company might fail to meet financial obligations as early as April 1 when the convertibles mature.

Moody’s rates Zenith convert

Moody’s Investors Service rated Zenith National Insurance Corp.’s new convertible at Ba1, with a negative outlook.

The rating reflects a track record of underwriting discipline, but at the same time recognizes the risk inherent in its quasi-monoline focus.

Moody’s expects the company to continue its focus on underwriting profitability versus revenue growth, as Zenith’s ratings and capital base cannot sustain the current pace of premium growth without earnings improvements and internal capital generation.

S&P cuts Fleming ratings

Standard & Poor’s lowered Fleming Cos. Inc. senior secured debt to CCC from B, senior unsecured debt to CC from CCC+ and subordinated debt to C from CCC.

The downgrade was based on the company’s likely need for covenant relief, the lack of a new or renegotiated bank facility, and reports that Fleming has hired Gleacher & Co., an investment bank that advises companies on renegotiating debt and finding new financing sources.

There is currently sufficient room under the $550 million revolving credit facility for further borrowings, though covenant levels are very tight.

Challenges include an SEC inquiry into accounting matters and the recent departure of the CEO.

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