HealthSouth falls on news of SEC probe; Allied Waste deal pushed to Friday

By Paul Deckelman and Paul A. Harris

New York, Sept. 19 - HealthSouth Corp. shares and bonds were looking pretty sickly on Thursday, after the outpatient surgery center and rehabilitative services company confirmed press reports that it is the subject of a Securities and Exchange Commission investigation and Standard & Poor's completed the former investment-grade rated company's fall to junk status.

In the primary sphere, Allied Waste Industries Inc.'s quickly shopped $250 million offering of 10-year notes (Ba3/BB-/BB-), which had been expected to come to market on Thursday, was instead being talked about as Friday's business, even as price talk on the issue was heard to be pushing northward.

Talk on the offering, to be issued through the company's Allied Waste North America Inc. subsidiary, is 9%-9¼%, syndicate sources told Prospect News. They added that the deal, via Deutsche Bank Securities Inc. and Credit Suisse First Boston (with nine additional firms on the syndicate) is expected to price on Friday.

A market source who spoke with Prospect News earlier in the week of Sept. 16 said that Allied Waste could conceivably have come with an 8-handle, although this source allowed that just as easily price talk could be in the low nines.

Another informed source said Thursday that for openers, a day on which the Dow Jones Industrial Average drops 230 points does not precisely make the perfect setting for pricing a $250 million junk bond deal.

"The market's down today, and that's forced things a little bit wider so Allied bonds have fallen off," the source said.

This sell-side official also noted that the company plans to use the proceeds from the new notes to term out bank debt that matures in 2004, making for a hefty increase in the interest rate Allied Waste will pay.

"At the end of the day you're replacing bank debt, which is (approximately) 5%, with 9% paper," the source said. "So things have dropped a little bit for them."

David Marsh, high yield analyst and vice president at Friedman, Billings, Ramsey, told Prospect News Thursday that the Allied Waste deal comprises a smart play on the part of Allied Waste's management.

"This is a company that is going to cash-flow a couple of hundred million dollars a year, and they will use the cash flows to pay down debt," Marsh said. "We're projecting that they are going to cash flow about $314 million this year.

"This takes a little bit of pressure off the company. It resolves the '04 maturity issue.

"There's another debt maturity issue in 2006, where they have $1.5 billion coming due," Marsh added. "They still need to address that maturity. But if they do this deal they buy themselves some time in order to work out an agreement with the banks and term out the remainder of the bank maturity schedule."

Marsh noted that thus far Allied Waste has nothing in its "2012 maturity bucket," and that the new offering represents "a great deal for them to put some 10-year debt in place because they're still going to have a nice maturity ladder."

Like the sell-side official quoted above, Marsh noted that Allied Waste is replacing bank debt that has a comparatively low interest rate, with the substantially higher fixed rate of the notes.

"From that perspective this isn't a cure-all but it buys them some time," he said. "And I think that's important in this market environment: to buy yourself some time and deal with a maturity issue a couple of years ahead of time. It's a tribute to the management team that they're looking out as far as they are and getting ahead of it instead of letting it sneak up on them."

Aside from the developing Allied Waste story, the primary market also heard Thursday from the investment banks running the Jefferson Smurfit plc's €900 million equivalent of 10-year senior notes.

Price talk of 9½%-9¾% emerged on the dollar tranche and talk of 10% area was heard on the euro tranche. The sterling tranche was canceled, sources told Prospect News, as investors were demonstrating a preference for a bigger, more liquid euro tranche.

That offering, via Deutsche Bank Securities and Merrill Lynch, is set to price on Monday.

Meanwhile the market heard that the Chukchansi Casino deal, Chukchansi Economic Development Authority's $135 million of unrated seven-year senior notes via Dresdner Kleinwort Wasserstein and Banc of America Securities, figures to price on Friday.

Terms on the Coarsegold, Calif.-based tribal gaming firm's offering were expected earlier in the week by some market observers.

One sell-side official who spoke with Prospect News on Thursday said that in the present economic circumstances things could be much worse than they presently are in the primary market.

"What you saw during the past couple of days is a sign of strength in the market," this official said. You had a couple of big guys coming for drive-bys: HCA Healthcare (which priced $500 million in a split-rated deal at 250 basis points over, the source said) and Allied Waste. That's always a good sign.

"The high-grade market's really picked up, recently. I think things are heading in the right direction.

"I don't think you are going to see five or six billion, on a weekly basis, getting done here. But I do think you're going to see around a billion and a half a week for the next three or four weeks."

In the secondary market, a trader said that Allied Waste's existing bonds were weaker amid the uncertainty about its coming new deal; he quoted its 10% notes due 2009 as having lost about three points on the session, to end at 95 bid.

Another trader saw those bonds around that same level, commenting that "they keep getting lower as the price talk [on the new deal] keeps going up."

At another desk, Allied's 7 5/8% notes due 2009 were seen down four points on the session, at 93 bid.

Also on the new-deal-related front, Plains All American Pipeline LP's newly priced 7¾% senior notes due 2012 - which had priced Wednesday at 99.80 and then which had pushed up to 100.75 bid/101.25 offered in initial secondary dealings - continued to strengthen in Thursday's dealings, moving up to 101.625 bid.

The fact that the deal had been upsized to $200 million from the originally proposed $150 million and has performed very well in secondary trading so far "shows the strength of this energy business," said Matthew Chyra, a high yield energy analyst for BNP Paribas. "The pipeline business has always been kind of a jewel in the energy sector - they probably have even more stable cash flows than the E&P [exploration and production] companies," which Chyra said are themselves a pretty steady source of predictable revenues these days.

The pipeline companies "basically charge a tariff for transporting any product or raw material - crude or natural gas - through their pipelines, so there probably is no steadier business out there."

Chyra said that he was "not surprised" that the Plains All American deal was over-subscribed and priced inside of pre-deal market price talk of a 7 7/8% yield, at 7.78%. He called it "a very strong company, very well managed. "

Several months ago, he said, the Houston-based company had taken over a floor of offices formerly occupied by the fallen energy trading giant Enron Corp. "Just to show how well they run their operation, they were so cost sensitive that they came in, turned on the computers [in the old Enron offices] and a few months later came to the market with a new issue. They're a phenomenal company."

Chyra added that he "wouldn't be surprised" if a continued upward trend in natural gas prices were to coincide with increased merger and acquisition activity - "and then somewhere down the road, more new issuance from the energy sector."

Back among the established issues, HealthSouth's bonds "were sloppy," a trader said, with the offering levels on its 10¾% notes falling to 68 from Wednesday's finish at 73 bid/75 offered, although he allowed that he really hadn't seen much in the way of actual trading in the troubled healthcare credit.

Another trader quoted the Birmingham, Ala.-based outpatient surgery and rehabilitation company's 7 5/8% notes due 2012 as down at least two points, perhaps more, at 67.5 bid/68.5 offered.

HealthSouth shares were down $1.11 (26.68%) in New York Stock Exchange dealings Thursday to close at $3.05. Volume of 28 million shares was more than five times the usual turnover.

The company acknowledged Thursday that it was under investigation by the SEC, and said that it was empanelling an independent board committee to investigate the claims put forward in shareholder litigation.

The company recently cut earnings forecasts, and its chairman, Richard Scrushy, has come under fire amid allegations of possible insider trading.

In response to the latest developments, Standard & Poor's on Thursday cut its debt ratings on the credit, including that of its senior unsecured debt, which was lowered two notches to BB from BBB- previously. The ratings agency cited "the expectation of weaker cash flow from HealthSouth's outpatient rehabilitation operations related to Medicare billing revisions," as well as the SEC probe.

S&P's move completes HealthSouth's fall from its former lofty investment grade status; Moody's Investors Service lowered its ratings to Ba1 from Baa3 previously on Aug. 1.

The troubles of HealthSouth apparently did not spill over into other healthcare related names; Magellan Health Services Inc.'s 9% notes due 2008 were actually up more than three points on the session, at 37 bid, while Triad Hospitals Inc.'s 8¾% notes due 2009 were being quoted up half a point around the 106 bid level.

Lucent Technologies Inc., whose bonds and shares have been getting drubbing in recent days on investor fears of continued weakness in the telecommunications industry that buys the company's equipment, continued to weaken Thursday, its 7¼% notes due 2006 quoted at 47.5 bid/48.5 offered from prior levels around 50 bid/51 offered. But there was no further deterioration in the bonds of Nortel Networks, another equipment maker, which had retreated along with Lucent on Wednesday amid a ratings agency downgrade. "They pretty much had their movement [Wednesday], a source said.

Nextel Communications Inc. bonds - which have recently run up to very strong levels - weakened a bit on Thursday, after its chief operating officer James Mooney, announced plans to leave the company, effective Sept. 30, for personal reasons, although some in the market said that since Nextel is not in the kind of trouble that certain other telecom companies have found themselves in over recent months, such an announcement was not ominous. They noted that the bonds have recently appreciated strongly and would be expected to retrench a little bit now and then.

Back in the energy sphere, Nuevo Energy 's 9 3/8% notes due 2010 and 9½% notes due 2008 were seen little changed from their recent levels above par; the Houston-based energy E&P company announced that it had agreed to purchase Athanor Resources Inc. for a total of about $102 million in cash, stock and debt. Nuevo will pay $62 million in cash, about $20 million in its own stock, and will assume a further $20 million of debt.

In exchange, it will get 100 billion cubic feet of proven and potential natural gas reserves, said BNP Paribas energy analyst Chyra - effectively doubling its reserves and diversifying their source, since Nuevo, which has most of its reserves in California, will be gaining a working gas field in Texas.

Chyra said that the fact that the bonds are hanging in in the face of the deal "is a reflection of the quality of the acquisition," which he called "strategically imperative" for Nuevo. The company, he said, had shopped around for at least six months before deciding on the Athanor purchase.

He said that the company's bondholders recognize that the $20 million of additional debt, though senior to the bonds, is a relatively small price to pay, given the reserves the company is acquiring, as well as the expected savings it will generate through expected job cuts in Athanor's front office, and he predicted that given expected continued strong cash flows, that additional debt would be repaid fairly quickly. He also noted that Nuevo over the past several years has made great progress in cleaning up its balance sheet and otherwise structuring itself to take advantage of the currently strong energy market. "This company," he concluded, "is much stronger than it was."

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