HealthSouth drops sharply as noteholders declare default, Scrushy indicted; Owens Corning recovers

By Carlise Newman

Chicago, Nov. 4 - HealthSouth Corp. debt fell sharply after reports late Monday that the company's noteholders had declared the company in default. Tuesday's news that former chairman Richard Scrushy had been indicted in an accounting scandal did nothing to help the troubled healthcare provider.

After the close Monday HealthSouth said that it had received a notice of technical default from holders of certain of its senior notes and its senior subordinated notes.

The notes provide for a cure period, following which the noteholders would have the right to accelerate payment of the outstanding amount on the notes.

HealthSouth's benchmark 7 5/8% notes due 2012 dropped "a good 5 to 6 points" to 81 bid, 83 offered, one trader said.

"The paper dropped like a stone right out of the gate," he said. "It was expected."

The company said in a news release that it is current on all interest payments due to its bank and noteholders. The company also reiterated it intention to remain current on all upcoming interest payments.

"We have presented all of our creditors with term sheets and are awaiting their response," said Joel Gordon, HealthSouth's interim chairman, in the news release. "While there are natural tensions that arise in any negotiation process, [Monday's] action we believe is a very public tactic by the holders of these notes to try to extract greater value at the expense of our other stakeholders. We firmly believe that there is equity value in HealthSouth and we are unwilling simply to give more shareholder value away to our bondholders than is fair. We will continue to do what is right for the benefit of all HealthSouth stakeholders."

Meanwhile all over the news were reports that Scrushy was indicted on 85 criminal counts, including conspiracy to commit fraud, in connection with the massive accounting scandal at the Birmingham, Ala.-based company he founded.

Federal prosecutors have accused Scrushy of overseeing a scheme to deliberately inflate HealthSouth's earnings and assets by more than $2.5 billion over several years. Scrushy has denied he had any part in the fraud, blaming it on his subordinates.

Also Tuesday Owens Corning paper was "a bit better" according to a trader after being burdened by pessimism about talks in Washington that are focused on finding a comprehensive legal settlement of asbestos claims - both at Owens Corning and elsewhere.

Struggling in bankruptcy and grappling with numerous claims of asbestos-related illnesses caused by its own plants, Owens Corning slipped Monday on pessimism about the changes of the talks - between companies, their insurers and asbestos claimants - reaching a successful outcome

Adding to the Toledo-based flooring company's woes was a recent request by two holders of Owens Corning bank debt to have U.S. District Court Judge Alfred Wolin removed from the case.

The funds alleged that Wolin hired two consultants to help with five asbestos cases, including the Owens Corning case, who have a conflict of interest because they also represent a class of asbestos plaintiffs in the G-I Holdings Inc. bankruptcy case.

The funds suggested that the consultants' role in the G-I proceedings makes them biased toward asbestos plaintiffs.

In Tuesday's trading, Owens Corning paper improved by 1 point on Tuesday, after dropping 1½ points on Tuesday. The debt had been floundering at those lower levels around 43 bid earlier in the morning, according to traders, before rising a point before the close.

"This isn't the end of the slide in the bonds. This asbestos stuff is very messy and ultimately always has a negative outcome for the companies," one market source said.

Elsewhere, WorldCom Inc. was barely changed, but actively traded, still glowing from the news that its confirmation plan had been approved.

WorldCom's debt was ¼ higher at 37½ bid, according to a trader. The bonds rose 2 points Friday in anticipation that the plan would be approved, and rose 2 points Monday.

"Unless something crazy happens, the bonds are going to just rise slowly like they have been doing for a while now," one trader commented.

Under the reorganization plan, holders of WorldCom senior debt - both bank debt and notes - may choose to receive 14.36 shares of new common stock for each $1,000 of the holder's allowed claim, or new notes at the rate of 35.9 cents on the dollar.

Unsecured claim holders will receive 7.2 shares of new common stock for each $1,000 of the holder's allowed claim and cash at the rate of 17.9 cents on the dollar. Holders of WorldCom's subordinated claims and equity interests will receive nothing.

Meanwhile, Denny's Corp. paper was higher. The 11¼% notes due 2008 were up 2 points on the session at 63½ bid. Another source pegged the notes as going to 65 bid, 67 offered during the session, then falling back to around 64 bid, 66 offered.

After posting dismal third-quarter earnings last Wednesday, the restaurant chain had good news Friday with positive October same-store sales of 3.9% as of Oct. 22.

As a result, the bonds gained 4 points Monday. The previous week, they had wallowed at levels in the mid-50s.

(Paul Deckelman contributed to this report)

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