Province Healthcare jumps on LifePoint buyout news; Hanger up on apparent paid coupon

By Paul Deckelman and Paul A. Harris

New York, Aug. 16 - Province Healthcare Co.'s bonds were heard to be in robust condition on Monday, firming smartly on the news that the Brentwood, Tenn.-based hospital operator has agreed to be acquired by Life Point Hospitals Inc. in a $1.7 billion deal that will see LifePoint take out Province's outstanding $200 million of 7½% senior subordinated notes due 2013 as well as its convertible debt, either via tender offers or through open-market transactions.

Another healthcare name was seen to have made a drastic recovery, as Hanger Orthopedic Group Inc. was heard by a market source to have made the $10.37 million scheduled interest payment on its 10 3/8% notes due 2009 - something a number of analysts and other market participants had not expected the cash-strapped company to actually do.

On the downside, American Seafoods Corp.'s 10 1/8% notes were floundering around at lower levels, in a delayed reaction to the news late last week that the Seattle-based fish processing company had postponed its planned offering of income deposit securities and had terminated a separate tender offer for the bonds.

In the primary sector, no new offerings were heard to have priced by the time trading wrapped up - not an atypical performance for the new-deal market heading into the latter part of August, well into the dog days of summer, particularly with a relatively thin calendar dominated by small deals. Price talk, however, emerged on Standard Aero Holding's upcoming issue of 10-year notes, which is expected to price on Tuesday.

Province Healthcare's 7½% notes opened Monday morning around the same 97.5 bid, 98.5 offered level they had recently held - but zoomed up to 111 bid, 113 offered, a trader said, on news that cross-town rival LifePoint had agreed to acquire Province for $1.13 billion in cash and stock, plus the assumption by LifePoint of $570 million of Province debt, including the 71/2s.

A bank loan market source said that LifePoint will fund the acquisition with a new credit facility, launching after Labor Day, that is expected to consist of up to $1.325 billion in term loans and up to a $400 million revolving credit component. However, on a morning conference call following release of the acquisition news, company executives raised the possibility that a portion of the acquisition could be funded through the issue of new junk bonds or convertibles.

All of Province's convertibles and bonds will be taken out as part of the acquisition, but it is undecided whether this will be done in tender offers or in open market transactions, officials said during the call.

"It looks like the [existing] bonds are going to be tendered for," a trader said, "and people in the street figured that Apogent [Technologies Inc., the laboratory science products company recently acquired by sector peer Fisher Scientific International Inc., which successfully tendered for its 6½% senior subordinated notes due 2013], the most recent one, was tendered for at around 85 [basis points] off [comparable Treasuries] and that's what people are thinking for Province - around 115, 116 is the right dollar price.

"They'll probably be taken out at a higher level [than 111-113]," the trader opined. He explained that the bonds might be hanging back a few points from that 115-116 area because "there's always a little deal risk, although in this case, I would say the deal risk, the execution risk, is almost zero, since LifePoint has the guaranteed facility" from Citigroup, the sole lead bank on the deal.

"Regulatory-wise," he continued, "it's two rural hospital companies so there's probably not" much in the way of likely anti-trust or other official objections, "and this talk about the two companies merging has been bandied about for a while. So I don't see much of a deal risk."

He speculated that before going through the not inconsiderable expense and hassle of setting up a formal tender offer for the 7½% notes, "they'll probably try open-market purchases first. But they're probably going to have to pay up around [at least ] 113.5, 114 to get the bonds, If T+85 [bps] is 115.5, even if you discount it back say 10%, that's 114, 113.5."

With the bonds having shot up in anticipation of being taken out, "there are buyers around. There were 111 buyers, without a doubt. So it just depends on where people are willing to part with them." He said "most people would probably only end up holding onto it for the tender."

He concluded that the bottom line, however, was that whether the 7½% notes would be tendered for or the company might just buy them in the open market, "however they will be going about getting [Province's] bonds out, one way or another, they're coming out - they said that on the call."

Hanger gains as coupon heard paid

Elsewhere, Hanger Orthopedic was heard by a market source - who said he had heard it from the transfer agent - to have apparently made the scheduled coupon interest payment on its 10 3/8% notes, apparently ending a week of intense speculation about whether the Bethesda, Md.-based operator of orthopedic medicine and prosthetic clinics would actually make the $10 million-plus payment, given the strained state of its finances.

Hanger's notes - which last week had tumbled all the day down to the low 80s from prior levels around par, after it said in a Securities and Exchange Commission filing last week that it would have to delay releasing its second-quarter results by a weeks while it completed a review of accounting issues - had by the end of last week managed to claw their way back up to around 86-86.5 bid. From there, the bonds firmed solidly Monday to end around 89 bid, 90 offered, with traders attributing the strength to market expectations that Hanger would make the payment, despite its thin corporate wallet.

The company had said in the SEC filing that it had but $14 million in the bank as of Aug. 6 - enough to slide by with the coupon payment, but then it would be almost out of cash. Some analysts and other market players speculated that the company would not make the payment. The company, on the other hand, did not officially announce either that it had made the payment or, conversely, that it had not made the payment - although it did put out a release on earnings and file a 10-Q with the SEC, neither of which mentioned anything amiss with the coupon payment. Numerous calls by Prospect News to senior executives of the company over the past several sessions, including Monday, seeking clarification, went unreturned.

The status of the interest payment - as well as the company's admission that it is in default on one of its credit facility financial covenants related to the results of its operations for the trailing 12 months ended June 30 and needs to get a covenant waiver from its lenders - is likely to be discussed in detail on the conference call the company will hold on Tuesday morning at 9 a.m. ET.

In releasing its second-quarter earnings results after the closing bell, as well as filing its 10-Q report with the SEC, Hanger said that it has scheduled a meeting Wednesday with its lenders to seek a covenant violation waiver, which it needs to have continued access to its credit revolver. It said in the filing that "in the interim, we have $18.3 million in cash available in our bank accounts on Aug. 13, 2004."

The source said that it was his belief that market knowledge that the coupon had been paid, or was going to be paid, was more responsible for lifting the bonds than equity-side speculation that the second-quarter numbers to be released after the close would be favorable, or at least benign. Such speculation helped push the company's shares up 78 cents (17.65%) to $5.20 on the New York Stock Exchange, on volume of 1.3 million, more than triple the norm.

"The coupon being paid lifted the stock and the bonds," he asserted, "because [investors] probably feel there's an emergency package in place to get them over a difficult period." Although by making the payment the company remains in compliance with its indenture, he indicated that "it leaves [their finances] pretty thin."

"I didn't think that there was much of a shot that they would not make the coupon," a trader said, "they have the availability now." But given the still shaky state of the company's liquidity, according to the SEC filing, "they're going to have to renegotiate with the banks at some point."

However, he said that now that the company had apparently made the coupon, "they've got some breathing room."

He noted that "the numbers were soft - but a lot of that probably also has to do with the fact that when you come out and say there's some sort of fraud allegation that's being investigated, you're going to lose business, you're going to lose market share, there's no question about it."

Hanger announced some weeks ago that it was looking into allegations of improper billings at one of its suburban New York centers, following a TV news report of the problem. Management's contention all along has been that any improprieties had been strictly isolated incidents, confined to that one center, rather than any kind of pervasive climate of abuse.

"Who knows?" he said, "maybe they will find out that really was some significant fraud, and then they're screwed." More likely, however, he said was that "once the air is cleared, the bonds will drift higher."

As far as the banks are concerned, Hanger did disclose it has a meeting scheduled for Wednesday to propose an amendment that would fix its leverage covenant violation. Although the amendment is expected to pass, the company will not have access to its revolving credit facility until it is actually obtained, Hanger said in the 10-Q.

American Seafoods down

On the downside, American Seafoods' 10 1/8% notes due 2010 were heard to have retreated to about 108 bid from prior levels around 116 that the bonds had held when it looked like they would be taken out via a tender offer funded by a new issue of income deposit securities. However, the company had spiked the tender offer and indefinitely postponed the IDS deal last week, citing market conditions.

Primary gets in summer spirit

Finally a mid-August primary market that behaves like a mid-August primary market, one source observed during Monday's ultra-quiet session in the new issues bazaar.

With an even half dozen of deals totaling $855 million on the calendar - most if not all expected to price during the present week - sources have advised Prospect News that the primary market is at long last preparing to take its holiday following an unusually vigorous burst of late summer business.

However, they added, drive-by deals between now and the Labor Day holiday can not be ruled out.

Two deals for Tuesday

Details emerged Monday on two offerings that sources expect to see price during the Tuesday session.

Price talk of 8½% area appeared on Standard Aero Holdings' $200 million of 10-year senior notes (Caa1/B-) via JP Morgan and Lehman Brothers

The Winnipeg, Manitoba-based aircraft engine and gas turbine services company's deal is an acquisition financing.

Also Monday, upwardly revised price talk of three-month Libor plus 800 basis points emerged Monday on Secunda International Ltd.'s $125 million of eight year senior secured floating-rate notes (B2/B).

The talk was revised from Libor plus 600-625 basis points.

Pricing is expected on Tuesday.

Call protection on the deal was increased to two years from one year last Thursday.

RBC Capital Markets is the bookrunner for the Halifax, Nova Scotia-based provider of supply and support services to the offshore oil and gas industry.

Intelsat, Denny's spotted on horizon

Also on Monday Prospect News learned that Intelsat would be coming to the debt markets with new bonds and a bank deal via Deutsche Bank Securities, Credit Suisse First Boston and Lehman Brothers.

The satellite telecommunications company will use proceeds to help fund the approximately $5 billion acquisition of Intelsat.

The deal is expected to close late in the third quarter or early in the fourth.

And Denny's Corp. received a Caal rating on $220 million senior unsecured notes on Monday.

In addition to the notes, the Spartanburg, S.C., family restaurant chain is obtaining a $375 million senior secured credit facility via Banc of America Securities LLC and UBS Securities LLC. The bank meeting is expected to take place on Tuesday.

Citi's Fenn sees strong demand

Citigroup high yield strategist John Fenn, writing in last Friday's Bond Market Roundup, the Citigroup bond strategy weekly, commented that the recent rally in Treasuries, triggered by less-than-stellar economic numbers, proved to be something of an elixir for high yield.

"The new issue market is already pushing harder on high yield than an August market is capable of handling - $8.3 billion in two weeks, which leaves the secondary market under some pressure and treading water at best," Fenn notes.

"The best thing that can be said for last week's job report is that it left the market in a position to absorb some weak technicals. With the Treasury market rallying, high-yield spreads backed off and left a good 20 basis points to 30 basis points of relative value room for the market. The added spread spurred some demand that kept the market from being hit harder by the weak technical environment, and would have been further challenged by its thinness. Imagine if the data had been strong and rates were pushing out! (Of course, without the Treasury rally, we do not have the heavy calendar testing the technicals.)

"Given that there was virtually no market reaction whatsoever, maybe the fact that the Federal Reserve raised the target Federal Funds rate by ¼ point to 1.50% was a nonevent. However, the fact that the Fed is steadfast in its assessment of the economy is, in our view, a net positive for the high-yield market. With the expectation that the economy is strong, and that this is indeed a 'soft patch,' it bodes well for a continuance of the strong fundamentals that have supported high yield. While each step of further tightening will eventually lead to a stranglehold on the market (emphasis of eventually), we think that the market will handle it and were further heartened that the Fed left the door open to correct its assessment if the current weakness were to manifest into something more serious."

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