HealthSouth falls further as bondholders hire attorneys; Fleming heads south as bank talks fail

By Carlise Newman

Chicago, March 28 - HealthSouth Corp. and Fleming were beaten down again in Friday's trade after both companies added more negative news to their growing lists. HealthSouth's bondholders have hired attorneys to protect them in case of bankruptcy, while Fleming confirmed it is looking for alternative financing and said that without it its future is in doubt.

American Airlines dropped the third bomb of the day after a New York Times article quoted bank sources saying the company is looking to put together more than $1.5 billion in debtor-in-possession financing, which would allow it to maintain its operations. The sources said the company could file for bankruptcy as early as next week.

But on the upside, WorldCom Inc. continued to press onward after a report earlier this week showed that the company is profitable.

HealthSouth bondholders have hired attorneys to protect their interests in the event of a bankruptcy filing by the financially strapped rehabilitation chain that has been charged with accounting fraud, a spokeswoman for the law firm said on Friday.

The bondholders, looking to ensure that bank creditors do not get priority over them in repayment of debts should the company file for Chapter 11 bankruptcy protection, retained Brad Scheler of the law firm Fried, Frank, Harris, Shriver & Jacobson, the spokeswoman confirmed.

JPMorgan Chase, the lead bank on the credit line, declared HealthSouth in default because it said Department of Justice and Securities and Exchange Commission investigations into HealthSouth's financial reporting constituted a material adverse effect under terms of the credit facility. And the company, which along with Chief Executive Richard Scrushy has been charged with accounting fraud by the SEC, last week said its financial reports could not be relied upon.

The Birmingham, Ala.-based hospital operator also said on Thursday it fired its chief financial officer, William Owens, who has pleaded guilty to fraud and has agreed to cooperate with prosecutors. Owens, however, will remain on the board.

HealthSouth's bonds were seen getting beaten down another 2-3 points Friday, according to a distressed trader. Its 7 5/8% notes due 2012 were quoted at 42 bid/44 offered compared to Thursday's price of 45 bid/48 offered, which was in turn down 4 points from Wednesday.

The company's bank debt was seen moving two points lower to 58 bid/60 offered.

"Nothing will really surprise me about them at this point," said a trader. "I saw the news come across the wire and it was, here we go, but actually there wasn't that much going on."

A welcome surprise earlier in the week however was WorldCom's news that profits rose. WorldCom said sales in January fell to $2.16 billion from $2.2 billion in December 2002, but its net profit was $155 million compared with a net loss of $580 million the previous month, and the first monthly gain since it declared bankruptcy last July. The Clinton, Miss.-based telecommunications company's sales have been sliding downward since its Chapter 11 bankruptcy filing in July, when it had $2.46 billion in monthly sales.

WorldCom has been steadily, if slowly, rising since the report. Traders quoted the company's bonds trading in the 26¾ to 27 range Friday. A distressed debt desk had quoted them at 25 to 26 Thursday.

"We saw some WorldCom, some Fleming, but our desk was a little quiet. Everyone's still watching Iraq," said a trader.

Fleming was walloped again Friday after the company warned that unless it gets additional near-term financing its 2002 financial statements could include a going-concern doubt. The Lewisville, Tex.-based consumer-goods supplier said in a release that based on talks with its bank lenders it doesn't expect to reach closure on an amendment to its credit facility. Fleming said it is now in talks with alternative financing sources.

Fleming also said it will seek a 15-day extension to file its Form 10-K annual report for fiscal 2002 from the SEC. The company said the extension is necessary to "properly account for and assess the significant business changes affecting the company."

The company's 10 1/8% senior notes were seen down 3 points at 24.5 bid/26.5 offered, after closing Thursday at 27 bid/29.5 offered.

Its bank debt was also weaker, bid at 81 and offered at 83. On Thursday there were trades at levels from 82.4 to 86.

And Fleming's 5.25% convertible due 2009 fell about 5 points to 7.625 bid, 11.625 asked, one trader said.

American Airlines was also in the trash pile Friday as rumors that the company is very near bankruptcy gathered speed. American Airlines' 9% notes due 2012 fell to 10 bid/12 offered after treading in the "low to mid-teens" for most of the week.

American may seek bankruptcy protection as early as next week, according to two bankers who were briefed on the carrier's efforts to line up financing ahead of a filing, The New York Times reported in its Friday edition.

The Times report quoted the bankers as saying the company may put together $1.5 billion in debtor-in-possession financing, with potential lenders Citibank, J. P. Morgan Chase, and the CIT Group.

In the report one banker said that the package could be assembled over the weekend. The other said that even if American did not reach an agreement with the lenders by next week, the airline could still file for bankruptcy protection and complete the financing shortly afterward, according to the Times.

Also in the news Friday, although not said to trade, was Reliant Resources Inc. On Thursday Standard & Poor's cut Reliant and three of its subsidiaries, to CCC from B-, and put it on CreditWatch with negative implications. In addition, Orion Power's senior unsecured rating was lowered to CC from CCC.

Fitch also cut Reliant on Friday to CCC- plus from B and revised its rating outlook to negative from evolving, implying there may be another downgrade in the cards.

Both Fitch and S&P cited concerns growing out of the Federal Energy Regulatory Commission ruling earlier this week. The commission said Wednesday that energy merchants, including Reliant, conspired to drive up power prices and limit supplies during California's energy crisis, echoing the finding of an administrative law judge.

Following the ruling, the FERC staff recommended that Reliant Energy Services, along others, be asked to show cause why their market-based rate authority shouldn't be revoked. Fitch said the "show cause" order has complicated Reliant's "ongoing negotiations with its lenders."

Reliant's $2.9 billion Orion bridge loan was due Friday. It had been extended from Feb. 19.

Asked if Reliant had paid off the facility Friday, a company spokesperson said she couldn't comment until an announcement was made.

"We've been saying all along that we expected this to go down to the wire," she said.

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