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Published on 3/25/2003 in the Prospect News Bank Loan Daily and Prospect News High Yield Daily.

HealthSouth slides again; Mirant, Dynegy up; airlines cheered by aid announcement

By Carlise Newman

Chicago, March 25 - Familiar names from recent days remained the most active in distressed debt trading Tuesday. HealthSouth Corp. plunged for the third straight day as the company dealt with fleeing investors after the recent SEC fraud charges. On the upside were airlines, reacting to positive news within the industry that it may receive an assistance package from the government. Also higher were energy companies Dynegy Inc. and Mirant Corp. after an announcement that the Federal Energy Regulatory Commission will not order higher refunds from the companies.

HealthSouth's bank debt was quoted falling from levels in the mid-40s Monday to 41 bid/43 offered Tuesday. On Monday, HealthSouth announced it hired Alvarez & Marsal Inc., a turnaround advisory firm, to help stabilize operations, address financial and liquidity concerns and to position the company for successful restructuring. In addition, the company announced that an independent director, Betsy Atkins, resigned. Atkins, a corporate governance specialist, was appointed to the board on March 10, just over a week before the SEC filed charges against HealthSouth and its chief executive, Richard Scrushy.

"HealthSouth traded in the low 40s but it's starting to die down a little," said a distressed debt trader.

Good news was finally seen in the troubled energy markets ahead of the meeting with the Federal Energy Regulatory Commission Wednesday, which analysts are projecting will go well.

Houston-based Mirant's 7 5/8% notes due 2006 were seen at 56.5 bid/54.5 offered, up from 53.5 bid/55.5 offered Friday, according to a distressed debt trader. Mirant's 7.20% and 7.40% notes due 2004 were seen bid in the low 60s.

"Mirant has seen better days but it was firmer today," said the trader.

Also, Dynegy's debt gained Tuesday ahead of the FERC meeting. Its 7.45% notes due 2006 were seen rising to 75 bid/77 offered after treading around 72 bid/75 offered Monday.

Analysts said that the commission most likely will not order significantly higher refunds from Mirant, Dynegy and other power sellers when the results of a probe into California's crisis of 2000 and 2001 are announced Wednesday. In December, a FERC judge found that suppliers overcharged state consumers by $1.8 billion, a fifth of what the state sought.

The commission will also rule on $43 billion worth of long-term power purchase contracts California officials say should be renegotiated. Commission law judges in two cases have found no ground to renegotiate the contracts.

A positive announcement elevated the fluctuating airline sector Tuesday as well. Senate Majority Leader Bill Frist said relief will be given to the industry in some form.

A trader quoted AMR Corp.'s American Airlines 9% notes due 2016 at 25 bid/27 offered, after Monday's closing price of 22 bid/24 offered.

The 9¾% notes due 2021 of UAL Corp.'s United Airlines - not a name uttered very often of late - were quoted at 13 bid/15 offered, up from Friday's levels of 10 bid/12 offered.

Another trader said airline bonds were "dead in the morning, but then they came back later" on Frist's news, and saw Delta Airlines' 6.65% notes due 2004 as much as 2½ points better at 77.5 bid/78.5 offered. But other traders and other market watchers failed to see very much movement, quoting Continental Airlines' 8% notes due 2005 as continuing to hover around 50 bid.

"The airlines were relatively quiet and generally unchanged," one market source said. "This was kind of expected,"

Another trader, while seeing the sector bonds up perhaps half a point, sloughed the move off, declaring "I didn't see much. The sector is still just hurting. Bondholders are saying 'show me the money'."

Frist's comments on new assistance follow opposition by some lawmakers before the war to adding to the $5 billion in cash and $10 billion in loan guarantees airlines received after the Sept. 11 terrorist attacks. The carriers earlier this month said the war may add $4 billion to losses this year and asked for that amount to help with costs such as security and insurance.

Earlier Monday, the airline industry was left out of the $75 billion war spending plan that President Bush presented to Congress. While the White House didn't rule out the possibility of providing aid, the current plan includes money only for airport security as part of the funding for homeland security.

American, Delta, Northwest Airlines Corp. and Continental Airlines Inc. have reduced flights because of lower demand since the conflict in Iraq began last week. Those reductions follow route cuts and the elimination of 98,000 jobs after the terrorist attacks.

Meantime, a trader said that Bethlehem Steel's badly distressed bonds firmed smartly - in relative terms - on the coming purchase of the Bethlehem, Pa.-based steel giant by International Steel Group Inc. Its benchmark 10 3/8% notes firmed to about six or seven cents on the dollar, up from prior levels around four cents.

"That doesn't sound like that much," he said. "But on a percentage basis, it's a lot."

(Paul Deckelman contributed to this report.)


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