HealthSouth active as allegations mount; energy sector livens; WorldCom actively trades

By Carlise Newman

Chicago, June 12 - Plagued with accounting scandals and accusations of fraud, HealthSouth Corp. has been very active in distressed debt trading this week, and Thursday was no exception.

HealthSouth's difficult week culminated in a newspaper report Wednesday questioning the company's relationship with its former accountant, Ernst & Young.

HealthSouth Corp.'s 10¾% senior subordinated notes due 2008 were said to be at 58 bid, 59 offered, and its 7 5/8% senior notes due 2012 were down to 77 bid, 79 offered, down about ½ point from Wednesday.

"They're down several points from 3 or 4 days ago, when they were in the low 80s," a distressed debt trader said.

HealthSouth Corp. has allegedly classified $2.6 million in payments for janitorial inspections of its healthcare facilities as audit-related fees, raising questions about the company's relationship with auditor Ernst & Young, the Wall Street Journal reported on Wednesday.

Citing spokesmen from both Ernst & Young and HealthSouth, the newspaper reported that Ernst & Young made the suggestions about how to classify the "pristine audits," which HealthSouth has openly described in regulatory filings. HealthSouth has said it has passed the pristine audits with almost perfect marks.

The Birmingham, Ala.-based hospital operator paid more to Ernst & Young for the inspections than it did for financial audits, the Journal reported. The company paid Ernst & Young $1.3 million a year for the pristine audits in 2000 and 2001 and $1.4 million in 2002.

In comparison, Ernst & Young received $1.03 million to audit financial statements for 2000, $1.16 million for 2001, and $1.1 million for 2002 results.

"It was fairly quiet today, but HealthSouth has been going strong the past few days. It seems the more they dig the worse that situation gets," said a trader.

The energy sector was "hopping" a trader said, with Calpine Corp. leading the pack. Early Thursday, Calpine announced a subsidiary had priced an $802 million offering of investment-grade senior secured notes.

"Calpine and Mirant were busy," a trader said.

Calpine's 8½% notes due 2011 were quoted at 75.5 bid, 76.5 offered, he said, one point higher than Wednesday.

The two-part offering was sold by the Power Contract Financing LLC unit of Calpine Energy Services. The notes are secured by cash flow from two contracts: an existing, long-term deal to sell power with the California Department of Water Resources and a new agreement to buy power from a financial institution.

The offering is for $340 million of 5.2% senior secured notes due in 2006 and $462 million of 6.256% senior secured notes due 2010.

The San Jose, Calif.-based energy company, which said in a news release it expects to complete the financing on Friday, said it will use the proceeds to fund capital expenditures.

Calpine, like many other power producers, has faced major financing challenges during the last several years as it suffered from a drop in electricity prices and demands.

"Mirant was all over the place today. The 7 5/8s opened at 72, then traded as high as 75 bid, and that was up anywhere from two to four points in the last few days," a distressed debt trader said.

Mirant's 7 5/8% notes due 2006 were up two points at 72 bid, 74 offered at another desk.

Late Tuesday holders of Mirant Americas Generation LLC bonds filed a suit to stop the company's exchange offer announced last week. The bondholders say the offer unduly favors creditors holding Mirant debt at their expense.

"I don't see how this one will get through," said a distressed debt trader of the exchange offer.

Mirant offered to exchange new secured debt for $1.45 billion of existing bonds due or putable within three years. Mirant is offering new senior secured notes due 2008 in exchange for its $750 million of 2.5% convertible debentures due 2021 but putable in 2004 and $200 million of 7.4% senior notes due 2004. Mirant subsidiary Mirant Americas Generation LLC is also conducting a similar exchange for its 7.625% notes due 2006.

Analysts have said if the bond exchange offer is blocked by legal action or turned down by creditors, the Atlanta-based energy provider would likely file for bankruptcy.

In other news, WorldCom Inc.'s 7½% notes due 2011 traded at 30.25 Thursday, a trader said.

"We saw a couple of trades come through at that level, just a nip higher than yesterday," the trader said. The notes had been down one point at 30 bid on Wednesday.

Fleming Cos. Inc.'s 10 1/8% senior notes due 2008 were quoted around 10. A market source said it's the first time the desk had seen Fleming in a while, and had last seen them at levels around 15.

Doman Industries Inc.'s 8¾% notes due 2004 were seen down a quarter of a point at 22 bid.

WestPoint Stevens Inc.'s 7 7/8% notes due 2008 were down a quarter of a point at 21.5 bid.

Arahova Communications, a unit of Adelphia Communications Inc.'s 8 7/8% notes due 2007 were up 3.5 points at 57.5 bid.

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