Hanger hung out to dry on subpoena news; Pegasus bonds lower

By Paul Deckelman and Sara Rosenberg

New York, June 21 - Hanger Orthopedic Group Inc. bonds and shares were lower Monday - and bids on its bank debt were heard to have dried up - in response to the late-Friday announcement by the Bethesda, Md.-based provider of orthotic and prosthetic patient-care services that it had received a subpoena from federal prosecutors seeking records in connection with alleged billing irregularities.

After a local New York TV news broadcast aired charges last week that a clinician in one of its area centers had allegedly signed doctors' signatures on prescription forms, Hanger revealed that an employee had already informed the company and said it had mounted an internal investigation.

But that apparently wasn't good enough in today's post-Enron/WorldCom/Adelphia/Tyco environment of zero tolerance for financial irregularities, real or presumed. On Friday after the markets had closed for the week, Hanger announced that it had received a subpoena the previous day from the U.S. Attorney's Office for the Eastern District of New York, requesting that the company produce documents relating to the allegations. The federal probers are also seeking information concerning 14 of the company's patient care centers located in the New York metropolitan area. The Securities and Exchange Commission also requested information from Hanger relating to the allegations.

A market source quoted Hanger's 11¼% notes due 2009 - which last week had fallen as low as 101.5 bid from prior levels at 108.5, before working their way back up to 105 around midweek - as having dropped back to par bid Monday on the latest news. Its 10 3/8% notes due 2009 - which likewise had gyrated between 106.5 and 101.75 before settling in at 104 - tumbled to 99 bid on the latest developments.

Hanger indeed "was softer today," a trader at another shop, citing the subpoena news, even though at this point, "we don't really know how wide or how big a scope is expected."

He noted that the 14 downstate New York centers the feds are investigating account for a relatively small portion of the company's business - perhaps $12 million out of its $553 million of annual revenues.

Still, "it's definitely negative news, though not tremendously negative as far as the scope of it" is concerned.

Among players in the bank debt market, Hanger's mounting troubles have them wondering whether this name will soon be trading off distressed desks, as opposed to the par desks it is - for now - now quoted on.

According to one loan trader, Hanger's paper is currently being quoted around par. But a second trader was hesitant to put a level on the debt, as he had seen no bid in the marketplace.

"It was 101 a couple of weeks ago. Now where's the bid?" the second trader demanded. "The bonds were 108. Now they're 981/2, par. The stock hasn't had an uptick since June 8. And since June 10 the stock has dropped like a rock. This smells ugly. It's still a par name - but it's hinting at distressed levels."

Hanger's New York Stock Exchange-traded shares swooned Monday in reaction to news of the federal probe, nosediving $2.47 (20.91%) to $9.34 on volume of 1.63 million shares, nearly 10 times the usual daily turnover.

Pegasus bonds drop

Elsewhere, Pegasus Satellite Communications Inc.'s bonds were seen lower by about two points. No news was seen out during the session, a trader in distressed securities said - although after the market had closed for the day, Pegasus' legal nemesis, DirecTV Group, said that the U.S. Bankruptcy Court in Portland, Me., that is handling Pegasus' reorganization had earlier in the day denied the Bala Cynwyd, Pa.-based satellite television programming distributor's request for a temporary restraining order aimed at stopping DirecTV from marketing its service directly to consumers in areas served by Pegasus.

"We are pleased that Judge[James] Haines understood our position and is allowing DirecTV to continue to offer a competitive multichannel alternative for millions of consumers in rural America," Steve Cox, the executive vice president, for sales, distribution and business development for DirecTV, an El Segundo, Calif.-based satellite programming provider, said in a statement. The bottom line, DirecTV said, is that it can continue to market its service and activate new customers in Pegasus territories.

Pegasus - for the moment - distributes DirecTV programming to its 1.1 million customers in mostly rural markets, but the two companies have been feuding for some time over just how much those customers should actually be worth to DirecTV. After months of legal wrangling, DirecTV and the National Rural Telecommunication Cooperative - a TV programming distribution industry group of which Pegasus was the largest member - agreed to end the exclusive right of NRTC members like Pegasus to sell DirecTV in their territories, causing Pegasus to cry "foul," allege that DirecTV and NRTC were conspiring to destroy its business, and file for bankruptcy protection. In response, DirecTV began marketing its service in Pegasus' formerly exclusive territories, sparking the latest court confrontation.

In advance of that ruling Pegasus senior bonds, such as its 9 5/8% notes due 2005 and 12½% notes due 2007 were being quoted two points lower at 47 bid. At several desks, the Pegasus bonds were pegged two points down on the day but around the 46 bid, 48 offered level. Pegasus' badly deteriorated junior 13½% notes due 2007 were seen having retreated to 13.5 bid from 15 previously.

RCN holds steady

Also on the communications front, little movement was seen in RCN Corp.'s bonds, which were still quoted around the 61 bid, 63 offered level, even as the bankrupt Princeton, N.J. -based telecom provider's exit facility drew objections from Vulcan Ventures and Wells Fargo, both of them preferred shareholders (see related article elsewhere in this issue).

Technicals help some Adelphia loans

Disputes over provisions in its exit financing have also recently bedeviled Adelphia Communications Corp. On Monday, the bankrupt Greenwood village, Colo.-based cable operator's non-coborrower paper was slightly stronger on market technicals but its Century Communications revolver felt slightly weaker.

Bank debt of Adelphia's FrontierVision was quoted at 99.75 bid, 100.25 offered. Its TCI bank debt was quoted at 98.875 bid, 99.25 offered, and the Parnassos bank debt was quoted at 98.875 bid, 99.25 offered, with all three tranches up about an eighth of a point, a trader said.

"People are looking to put money in floating-rate paper," the trader explained.

However, the Century revolver was lower by about a quarter of a point, with the paper quoted at 96 bid, 96.25 offered, the trader added.

Most recently, Adelphia has run into objection after objection to the non-refundable fees, estimated to range from $20 million to $80 million, connected with its exit financing facility, which was lined up through Deutsche Bank Securities Inc. A hearing on the matter was scheduled to take place on Monday.

Opponents argued that if the Adelphia committed to paying the fees, it would send the wrong signal to potential buyers of the company's assets. After receiving numerous creditors' objections to its proposed stand-alone reorganization, Adelphia reluctantly said that it would look into auctioning the company's assets.

Following the opposition to the exit facility fees, Adelphia negotiated lower commitment fees. Under the amendment, the company will not be liable for any fees until the court approves the facility and enters an order doing so. Under the original agreement, Adelphia began accruing fees on Feb. 24.

Also, under the amendment Adelphia can terminate the commitment letter without being liable for a lump sum $10 million termination fee.

Leap back on upward path

Elsewhere, Leap Wireless International Inc.'s bank debt started its climb again on Monday, this time moving higher by about half a point to 126.75 bid, 127.25 offered, a trader said.

The San Diego-based telecom operator's paper has lately been rallying on strong valuations and the expectation of good monthly numbers, but did manage to take a slight breather on Friday, ending the day basically unchanged at 126.5 bid, 127.25 offered.

Horizon Natural Resources' bank debt traded up at around 56 on Monday, with the paper closing at 55 bid, 57 offered by the end of the day, up about 2.5 points, according to a trader.

"There's more bullishness on coal companies to pass through pricing. All the comps equity was up. Look at Arch Coal. Its equity was stronger," the trader explained. Arch Coal Inc.'s stock closed at $34.62 up $0.99 on the day.

Horizon Natural Resources is an Ashland, Ky. producer of steam coal.

Back among the bond investors, a trader quoted Dan River Inc.'s notes higher, but said he saw "no real activity" in the bankrupt Danville, Va.-based textile company's bonds, which were now being quoted at 25 bid, 26 offered, up from 23 bid, 24 offered last week.

And he saw UAL Corp.'s notes having moved up to 9 bid, 9.5 offered from prior levels at 7.5 bid, 8.5 offered, "right back to where they were before the government [last week] turned down their request for loan guarantees."

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