HealthSouth sustains slide; Calpine paper rises on increased profit; WorldCom slowing down

By Carlise Newman

Chicago, Nov. 5 - HealthSouth Corp. debt was still dropping in distressed debt trading Wednesday after saying late Monday that some of its noteholders had declared a default, and after the company's former chairman was indicted on 85 criminal counts.

HealthSouth's benchmark 7 5/8% notes due 2012 fell 3 points to 78 bid, 80 offered, one trader said. The bonds had fallen 6 points on Tuesday.

"HealthSouth was definitely the focus with the scandal and the mess surrounding it. I would assume the slide in the bonds is due more to the default news than the indictment. You'd think investors would be happy to have that guy put away," a trader said.

HealthSouth said after the close Monday that it has 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.

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

The company's former chief executive officer Richard 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.

Meanwhile, Calpine Corp. paper was flying high after the company reported a 57% increase in profit for the third quarter, mostly due to gains on the repurchase of outstanding debt.

The San Jose, Calif., independent power producer reported net income of $237.8 million, or 51 cents a share, up from $151.1 million, or 34 cents a share, a year earlier. Revenue rose 8.6% to $2.69 billion from $2.47 billion.

A trader saw its 8½% notes due 2011 at 70 bid, 71 offered.

The bonds had been dragging in the low 70s after Moody's Investors Service downgraded the company's debt ratings earlier in the month including lowering its senior unsecured notes to Caa1 from B1, citing the company's "weak cash flow and near-term outlook."

"They were flying off desks. Really hot," a trader said.

Calpine reduced its full-year earnings projection to between 85 cents and $ 1.00 a share from an August range of 90 cents to $1.20, based on lower spark spreads expected in the fourth quarter.

Results in this year's quarter included a net pretax gain of $192.2 million, or 23 cents a share, on the repurchase of various debt issuances and preferred securities at a discount. The gain was partly offset by a loss of a penny a share on other charges.

Excluding items, Calpine had income of 29 cents from continuing operations, beating analysts' forecasts of 23 cents a share.

So far this year, Calpine has completed $4.6 billion in refinancing transactions, including the repurchase of $1.4 billion in principal amount of its outstanding debt and preferred securities in exchange for $1 billion in cash and about $160.6 million in common shares. Calpine said it expects to end the year with liquidity of roughly $2 billion.

Elsewhere, WorldCom Inc. again was barely changed a few days after obtaining court confirmation for its reorganization plan.

The Ashburn, Va. telecommunications company's bonds were ½ point higher at 38 bid, according to a trader. The bonds rose 2 points Friday in anticipation that the plan would be approved, and rose 2 points Monday. They began to slow down during the next session with a rise of only ¼ point.

"We're starting to get focused on other things, finally. There's a lot of news out there right now that's rocking the market," he said.

In other news, Revlon Inc. bonds dropped after getting a boost Tuesday, possibly due to a story in the latest Business Week magazine outlining the company's problems, but praising new chief executive officer Jack Stahl, according to one trader. The article also said Ron Perelman considers that bankruptcy "is not a possibility."

Revlon's 8 5/8% notes due 2008 were down a point to 50 bid after rising 4 points Tuesday to 51 bid, one trader said.

Stahl, who came to Revlon in February, 2002, after 22 years at Coca-Cola Co., described the company as having lost its way. "A lot of things were just not working right," the story quoted him as saying. And now they do seem to be working better.

According to the story, Stahl has smoothed out many kinks in Revlon's operations and even gotten the core Revlon and Almay brands growing again in the face of deep-pocketed rivals such as Procter & Gamble Co.'s Cover Girl and L'Oréal's Maybelline.

"A Revlon bankruptcy proceeding is not a possibility," the story quoted a spokesman for Ron Perelman.

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