HealthSouth bank debt up on revolver pay-off talk; Solutia bonds firm

By Paul Deckelman and Sara Rosenberg

New York, Jan. 21 - HealthSouth Corp.'s bank debt headed higher by about two points on Wednesday, shrugging off an increase in the expected size of its accounting problems, as rumors circulated that the embattled company may pay down and/or refinance its revolver debt. Elsewhere, bonds of Solutia Inc. were heard trading at improved levels and Tropical Sportswear International Corp. bonds were being offered at higher levels.

HealthSouth's paper was quoted at 97 bid, 98 offered, up from previous levels of 95 bid, 96 offered, according to a trader.

"I saw it at 97.5, 98.5, but then it tightened a little bit to 97, 98. They had a lender call and said they're looking into refinancing their bank debt because there are inefficiencies. There's a rumor that they may do a bond deal to pay down their revolver and possibly even reduce their revolver size," the trader said.

"We have to develop a much more cash efficient management system," company officials said during the late-day Tuesday conference call. "In the coming weeks we will be looking at doing a refinancing."

As investors contemplated this potential pay down, they apparently ignored the newest expectations that the company's accounting errors will total $3.5 to $4.6 billion, an estimate revealed during a stockholder meeting and conference call Tuesday. Back in July, the beleaguered Birmingham, Ala., provider of outpatient surgery, diagnostic imaging and rehabilitative healthcare services projected somewhere in the area of $3.5 billion plus in accounting errors.

Revelations of major accounting irregularities - and federal indictments that said this was big-time fraud, to which a number of ex-HealthSouth executives pled guilty - helped drive the company's debt and stock prices way down in 2003; HealthSouth fended off bankruptcy talk and hired the turnaround specialist firm of Alvarez & Marshal to get it back on the right track.

As part of those efforts, the company last Friday announced that it had refinanced its 3¼% convertible notes, which had reached maturity last April 1 but which were not paid off till now, using the proceeds of the refinancing.

News of the transaction sent HealthSouth bonds up both Friday and Tuesday - Monday was a holiday - and those gains were seen continuing Wednesday.

HealthSouth "was up slightly," a market source said, quoting its 6 7/8% notes due 2005 at 100.125 bid, its 10¾% subordinated notes due 2008 at 105.125 and its 7 5/8% notes due 2012 at 99, "all up a bit."

However, another trader disagreed, pegging the company's bonds down a point across the board from Tuesday's close, adding "it seemed like there were sellers after" Tuesday's gains.

Another trader agreed, quoting the 7 5/8s offered at 99 "but with no left [bid] side. It might be a nip lower," although he said that his shop had not done anything in the name.

Tropical Sportswear reaches 65

The trader saw Tropical Sportswear's 11% notes due 2008 offered as high as 65, well up from previous levels in the upper 50s. The Tampa, Fla.-based apparel maker's bonds had slid sharply down to the upper 40s last week, from levels at least 30 points over that, after the company announced that it had posted a loss in its latest quarter - a sharp turnaround from the year-earlier profits.

A market source saw Solutia Inc. bonds "trading up," although he could give no explanation why and there appeared to be no fresh news out on the St. Louis-based chemicals maker. The source saw Solutia's 7 3/8% bonds due 2027 up two-and-a-half to three points from recent levels at 49.5.

Among other distressed names seen around, Adelphia Communications Corp.'s 9 7/8% notes due 2007 were better than two points higher at 97.

However, on the downside, Levi Strauss & Co.'s 12¼% notes due 2012 lost a point to 67 bid and the San Francisco-based blue jeans maker's 11 5/8% notes due 2008 were likewise a point lower at 69.

Doman Industries Ltd.'s 8¾% notes coming due later this year were a point better at 25.5 bid.

Overall, though, "it was a fairly quiet day" in distressed country, a trader at a distressed-debt shop opined. "There was nothing moving," at least in terms of major price changes.

He said that Finova Group's 7½% notes due 2009 were "fairly active," though unchanged price-wise at 64. Mirant Corp. bonds were also seen trading, he said, but did not move up or down.

Another trader saw just "creepy better bids," particularly in distressed auto-sector bonds such as Federal-Mogul Corp., languishing in the mid-20s, and Exide Technologies Inc., "a bit better" at 30. "But there really was not a lot of activity in distressed," he concluded.

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