Refinancing hopes, quest for delta provide buying catalyst; HealthSouth firmer on rescue hopes

By Ronda Fears

Nashville, April 3 - Hopes of better refinancing prospects lured buyers in several distressed names, and in a variety of sectors, traders said. Many players also were "clawing for delta," on optimism that a quick end to the war would give stocks a firm footing to head north.

HealthSouth Corp. also moved higher on some speculative buying, as a new round of guilty pleas emerged in the widespread accounting fraud case and sparked some hope that there might be room for a white knight to step in and rescue the crumbling rehab giant.

The HealthSouth converts were quoted at 13.75 bid, 14.5 asked, up from around 9 bid earlier this week. The stock, in over-the-counter trading, closed up 1c, or 9% to 12c, climbing back from as low as 2c in the wake of the scandal.

In general, traders said the market was better bid.

"As the battle in Baghdad approaches, which a lot of people think will be the end of it [the war], and after yesterday's rally, there is some optimism that the stock market will find some footing," a dealer said.

It's a meticulous search, however.

"It's tough in our asset class right now because the convertible market is so busted," said Richard Russell, portfolio manager for the Ariston Convertible Fund.

He said, however, that in looking over the market he's surprised to find so many lower-coupon convertibles with strong delta, plus puts that give them the appeal of short-dated paper.

"There have been a lot of these very small coupon converts with several puts over the last year or two," Russell said, mentioning Teva Pharmaceutical Industries Ltd., First Data Corp., GTech Holdings Corp. and Medicis Pharmaceutical Corp.

"I find them attractive, if you can pick them up below par. I'm not averse to buying something above par, so long as there's plenty of equity appreciation to be had."

Traders noted orders mounting for converts that are not very liquid, or tough to come by, as a result of the search for delta, also.

Orders gained steam sharply in the Allied Waste Industries Inc. mandatory Thursday, although it traded in rather a manic fashion in the gray market, so the books ended up closing pretty much on schedule.

The issue was seen trading 0.625 points over par first thing Thursday and went to 0.75 point over, but pulled back to trade at 0.375 bid over before closing with a bid of 0.25 point over and offer at 0.5 over.

Allied Waste also priced $100 million of common stock and launched a $300 million junk bond deal on Thursday.

Allied Waste shares closed up 18c, or 2.19%, to $8.40.

Early in the day, there was talk of closing the books early, around 2 p.m. ET, sources said, with orders running about five times the deal size - up from about 1.5 times on Wednesday. When that time came, the deal was about seven times oversubscribed but the source said the books were left open "to allow as many people to place orders as possible."

Terms were at the aggressive end, with the $300 million deal getting priced at par of 50 with a 6.25% handle and 22.05% initial conversion premium.

So, with the terms not getting tightened even though they came at the aggressive end of guidance, most buyers were relatively happy with the deal.

There was some optimism shining through on the HealthSouth front too or news that was being interpreted positively by some onlookers.

"From what I understand, there is a line of thought that once all the existing [HealthSouth] management is wiped out - they are dropping like flies, with all the guilty pleas - then there's a chance a white knight might step in and rescue this company," said a convertible trader at one of the bulge-bracket firms.

"They have some assets and a business model that should be doable, if managed correctly. A bankruptcy could still be inevitable, though."

CreditSights analysts Pearl Chang and Roger King have said the HealthSouth 3.25% converts are "worthless" in a bankruptcy scenario along with the 10.75% subordinated notes. They estimate senior noteholders would get just 30 cents on the dollar.

In what they admit is a hazard guesstimate, the credit analysts put a $2.8 billion base case value on HealthSouth's assets and a base starting point for EBITDA after minority interest in the $600 million range.

Five HealthSouth employees pleaded guilty Thursday to charges stemming from the massive $2.2 billion accounting fraud - $1.4 billion in overstated earnings and $800 million in inflated assets - alleged by federal investigators. At least three top executives, including recent and former chief financial officers of the company, have already pleaded guilty.

Attorneys for former chief executive Richard Scrushy, who was fired after he was charged in the case, filed court documents Thursday to be removed from his case and that was taken as a bad sign but generally just on a sensational level with little relevance to the company's prospects going forward.

"There is a lot of speculation going on right now," said a distressed trader, referring to HealthSouth's situation.

"You could hit a home run [with the converts]. But if you pick them up, even at 13 or 14, and it goes into default, you lose a lot of money, albeit not as much as if you bought them a month ago."

HealthSouth's convert was trading just 1-2 points below par on March 19 when the scandal broke - less than two weeks from the April 1 maturity date on the converts. While not yet in default, as there is a 10-day grace period, payment on the roughly $350 million converts outstanding has been blocked by HealthSouth's bank group.

Charter Communications Inc. also gained another 2-3 points on hopes that a $300 million capital infusion from Paul Allen will help the trouble cable operator buy enough time to avert bankruptcy.

The Charter 4.75% converts were quoted at 26.5 bid, 28.5 asked and the 5.75% converts at 29.625 bid, 31.625 asked. The stock ended up 0.0701c, or 7%, to $1.0701.

In general, traders said activity picked up a bit from earlier in the week when a good deal of market participants were busy with month-end and end-of-quarter paperwork, which some attribute to the absence of new deals this week.

Chatter abounded on new deals - who and when - though.

There was buzz again late Thursday about an overnighter, but that again did not pan out.

Nextel Communications Inc. was on the lips of many speculators, noting that the stock was getting pounded and the company filed a $5 billion shelf last week. One observer added that since Nextel has been in a debt-reduction mode, it also would make a lot of sense to replace older debt with new paper.

"They won't be able to entirely erase debt, but they could lower their cost of capital significantly by refinancing some of the older bonds with new ones," said an investment banker with one of the shops busy in convertibles.

"I'm not saying that's what they have planned, or that they have any plans. It would just make sense."

Certainly Nextel has been a name in the center of the new issue buzz for quiet a while and a deal would surprise no one.

"The whole convertible industry looks dry right now, a lot of guys, particularly hedgers, are in trouble," said another capital markets source.

"With all the redemptions, everyone is looking for new issues. We're hoping something will break that open soon."

Next week the market is looking for a couple of deals, at least, and both probably as overnighters or drive-bys.

Meanwhile, it's a matter of guesswork, albeit on an educated basis.

Several energy names are seen as prime candidates for refinancing deals - Calpine Corp., AES Corp., Mirant Corp. and Williams Cos. Inc.

A host of biotech names are in the mix, also, but many of those have to do with exchanges designed to restrike the conversion prices on existing issues.

Calpine a strong leader in the pack of refinancing hopefuls and traders noted a large degree of speculative buying, along with the distressed nature of the credit.

The Calpine 4% due 2006 added another 2-3 points Thursday to 75.25 bid, 76.25 asked. The underlying stock closed up 35c, or 9.3%, to $4.10.

"These things [Calpine converts] have fluctuated a lot in the past few months," noted a convertible dealer.

"They were in the low 60s just a while back, dropped into the low 50s and now they are back up in the mid-70s. It's difficult for a lot of people to price these things."

Decent flow was seen in the Hanover Compressor Co. converts on Thursday and all week, a couple of traders said.

"The buyers [for Hanover Compressor] were outrights and the sellers were on swap," one trader noted. "They are down probably about 3 points from last month."

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