DVI collapses under weight of looming bankruptcy; WorldCom steadies; HealthSouth higher

By Carlise Newman

Chicago, Aug. 14 - DVI Inc. bonds sank Thursday after the company announced late Wednesday night that it would file bankruptcy "in the next few days" and that it has not secured debtor-in-possession financing.

Despite discussion with potential funding sources, DVI said it was unable to arrange for funding required to continue operations. Its attempts at a sale or recapitalization have been delayed by the discovery of improprieties in its prior dealings with lenders, involving misrepresentations regarding the amount and nature of collateral pledged to lenders. An investigation into the improprieties has begun by DVI's audit committee.

DVI bonds were seen going out at 17-¼ bid, 18-¼ offered, a drop of "about 5 points," a trader said.

"We knew they'd open and tank right away. Then the follow-up news came out, ratings, delisting and so on, and they fell further," he added.

On Thursday, the New York Stock Exchange suspended trading of DVI Inc.'s common stock and 9.875% senior notes due Feb. 1

In addition, on Thursday, Moody's Investors Service cut the corporate bond ratings for DVI, according to news reports. DVI's $155 million of outstanding senior notes are likely to face a severe loss of principal when DVI is in bankruptcy, Moody's said. Moody's cut DVI's senior unsecured debt rating to C, Moody's lowest rating, from Caa3.

In addition, the Jamison, Pa.-based healthcare finance provider's chief financial officer, Steven Garfinkel, has been placed on administrative leave, and Anthony Turek and John Boyle have been assigned the functions of the office of chief financial officer, the company said in a news release.

WorldCom Inc.'s bonds, buzzing in recent weeks, have stabilized somewhat. The bonds were seen at 26-7/8 bid, 27-1/8 offered, a drop of only 0.125 point from Wednesday.

"There was a sudden flurry of activity in the afternoon, when rumors were out that FBI is looking to talk with the public on the rerouting," a trader said. He said the bonds fell to about 25 bid after the news.

WorldCom had been accused by rivals of improperly rerouting long-distance telephone calls to avoid paying hefty connections fees to other carriers. A review of company practices produced nothing so far.

Also, Ashburn, Va.-based WorldCom also announced monthly operating figures Thursday. During the month of June, WorldCom recorded $2.075 billion in revenue versus $2.034 billion in May 2003. Operating income in June was $146 million versus $116 million in May. The company had net income in June of $84 million compared to net income of $46 million in May.

HealthSouth Corp. was still basking in the afterglow of the news Tuesday that it had paid $117 million in past-due interest under various borrowing agreements.

HealthSouth's bonds rose slightly Thursday. The 6 7/8% notes due 2005 were seen rising 1 point to 91 bid, 92 offered, while its 8-½% notes due 2008 rose 2 points to 90 bid, 91 offered.

HealthSouth said it paid all the overdue interest owing on its bank debt and notes, a total of $117 million. The Birmingham, Ala. company also said it has begun talks with holders of its 3.25% convertible subordinated debentures on an exchange offer. HealthSouth owes $344 million in principal on the convertibles, which matured on April 1.

HealthSouth said it was able to make the overdue interest payments thanks to improving liquidity from operations and asset sales. It also intents to make upcoming interest payments.

Before making the interest payments, HealthSouth had $445 million of cash.

Reliant Resources Inc. was still weighted by a surprise second-quarter loss and again cut its full-year earnings target on Tuesday. The energy company also said it will undergo another round of restructuring.

Reliant's 9-¼ notes due 2010 and the 9-½ notes due 2013 slid to 81 bid, 83 offered, a drop of "another 2 points," a trader said.

On Monday Reliant said it had laid off employees people as part of cost-cutting efforts.

Reliant's second-quarter net loss was $5.9 million from year-earlier net income of $175.8 million. Revenue rose $2.83 billion from $2.19 billion.

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