WorldCom slides after cutting revenue forecast; HealthSouth still active after CEO statement

By Carlise Newman

Chicago, July 8 - WorldCom Inc. and HealthSouth Corp. remained lively in distressed debt trading Tuesday after both companies released major news. WorldCom, still reeling from the court approval granted Monday for its settlement with the Securities and Exchange Commission, fell further after cutting its revenue forecasts late Monday.

WorldCom said 2003 sales would decline by 15% to $24.5 billion, remain flat in 2004 and rise 2% to $25 billion in 2005.

In response WorldCom's 7½% notes due 2011 fell 2 points to 25 bid, 27 offered, a trader said.

The Ashburn, Va.-based internet and long distance phone company said its Chapter 11 bankruptcy has weighed on new sales in the first half of the year, while continued pricing pressures in the consumer and small business markets have dampened revenues.

The adoption of "do not call" legislation that allows consumers to escape telemarketing calls also weighed on results, WorldCom said. The confluence of these pressures has lowered small business and consumer rates by up to 40% in key markets since April 2003, the company said.

"It'll be a while before everything shakes out with them. They need to get a lot of stuff worked out," a distressed debt trader said.

On Monday, WorldCom received court approval for its amended proposed settlement with the U.S. Securities and Exchange Commission. The settlement calls for a civil penalty to the company of $2.25 billion to be satisfied by a $500 million cash payment and $250 million in common stock to shareholders and bondholders upon emergence from Chapter 11 protection.

The monetary fine was initially set at $1.5 billion, and later increased to $2.25 billion to reflect the revised settlement, but WorldCom will only pay $750 million because it is in bankruptcy.

HealthSouth was "rocketing" after announcing Monday it has a good chance of avoiding bankruptcy, one trader said - although that view was not unanimous; another saw the bonds retreating after Monday's big gains. HealthSouth also said in a conference call that it is expecting net revenue of $4.1 billion and free cash flow of $328 million over the next 12 months.

HealthSouth said it has a strong liquidity position. The company said it has consolidated book cash of $345 million as of June 27 "and growing" and positive cash flow from operations. It has executed annualized cost savings of $80 million, generated non-core asset sale proceeds of $70 million and is current on all operating payables, generally with normal payment terms

HealthSouth's bonds rose another 3 points Tuesday, making a 6 point jump in two days, one trader said, citing the 6 7/8% notes due 2005 at 90 bid, 91 offered, while the 8½% notes due 2008 rose to 88 bid, 89 offered. The bank debt traded at 89, and was last seen at 82 bid, 83 offered, a trader said.

"That's a huge jump," he added. "Especially during this quiet period, with earnings coming up."

HealthSouth also said it should generate EBITDA of $650 million for the year to June 30, 2004 and the company's divisions are "solid and profitable" according to a Securities and Exchange Commission filing documenting a presentation to employees.

But another trader saw HealthSouth lower.

He said the notes "came in about three or four points across the board" after having "shot up" on Monday. He quoted the company's senior notes in the 85.5 bid, 86.5 offered area and pegged its convertible bonds at 81 bid, 83 offered.

"I don't know if it was profit-taking or just people digging into the investor call held on Monday," he said, adding that "there wasn't a lot of substance on that call. Management just made projections, but didn't discuss how it was going to handle all of the investigations and lawsuits they have to deal with. And they still have to deal with two issues of maturing convertibles that they don't have the money for. They talk about getting new money - but the only place they could get that would be equity and where are they going to get someone to invest $500 million without being able to show audited financial statements?"

The trader declared that he saw no way out for the company but a Chapter 11 filing - a notion that management has steadfastly resisted, possibly, the trader said, because the current interim management is heavily invested in the company's stock, which would likely become worthless in the event of a reorganization, "along with its convertibles," he added. "If they filed now, they might be able to reorganize and they could get plenty of DIP (debtor in possession) financing - but management's equity stake would be wiped out. So right now, it seems like they're doing what they can to protect their own interests."

Adelphia Communications Corp. was active Tuesday, and its 9 7/8% notes due 2007 were seen trading at 63, ending the session at 61 bid, 63 offered, a trader said, down 1.25 points.

On Sunday, the unsecured creditors' committee of the bankrupt cable company sued hundreds of banks for providing loans to the Rigas family that controlled the company, according to news reports.

The suit claims damages of at least $5 billion and said the banks funded the alleged fraud committed by the Rigas family by providing loans and helped them to allegedly loot the company.

Elsewhere, Calpine Corp.'s 8½% notes due 2011 were quoted up two points at 76 bid, 78 offered. "Generally their debt is just rising on positive market sentiment," a trader said.

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