AK Steel falls to distressed levels on loss; HealthSouth continues to erode

By Paul Deckelman and Sara Rosenberg

New York, July 18 - AK Steel Corp. - which only a few months ago was trading near par - fell sharply into distressed territory on Friday after reporting a much wider-than-expected second-quarter loss, although the bonds later bounced part of the way back from their day's lows.

Elsewhere, Healthsouth Corp. bonds continued their recent retreat. Mirant Corp. bonds were little changed from the higher levels to which they had moved over the past several sessions, although the company's bank debt continued to reel in the wake of the Atlanta-based power generating company's Chapter 11 filing earlier in the week.

But trader said that AK was really the only name generating a lot of volume on an otherwise pretty quiet summer Friday. A distressed-debt trader said the bonds of the Middletown, Ohio-based maker of specialty steels were "trading quite a bit," on a day in which otherwise, he said, "nothing" was happening.

He quoted the AKs as having fallen into mid-to-low 70s, down about three or four points on the session.

Another trader saw AK's 7 7/8% notes due 2009, which had finished Thursday at 81.5 bid, 82.5 offered, as having "blown up," careening down to 71 bid at Friday's opening, although after that, he said, the bonds had managed to creep back up to 75 bid, 77 offered by mid-morning, but then "seemed to stop after around 11.30 [a.m. ET]."

He saw the company's 7¾% notes due 2012, which went home at 78.75 bid, 79.75 offered, as having opened Friday at 70 bid, 74 offered, before climbing part of the ways out of that hole to 74 bid, 76 offered.

AK said that it lost $78.2 million (72 cents per share), in the second quarter, a far cry from its year-ago profit of $16.2 million (15 cents a share).

Wall Street was expecting a loss - but nowhere near that large, with analysts generally forecasting a 43-cent-per-share deficit.

AK - which makes stainless steel, flat-rolled, carbon and electrical steel products - got hit with a double whammy. It said that steel shipments slid 7% from a year ago to 1.4 million tons. At the same time, its average price per ton of flat rolled steel fell to $682 from $708 last year.

The company blamed the revenue decline, in part, on weaker demand from Detroit for AK's steels in auto production.

Also taking some of the blame was a surge in pension and retiree health-care costs - an industrywide problem which has driven many AK sector peers, such as Bethlehem Steel Corp., LTV Corp. and National Steel, into Chapter 11 in the past year or so - as well as what it called a "poor environment" in the industry.

AK is considering cutting costs by shuttering its carbon-steel operations, which employ about 10% of its 10,000 workers.

Shareholders were meanwhile shocked by the numbers and took the company's New York Stock Exchange-traded shares down 49 cents (15.65%) to $2.64 Friday, on volume of 3.14 million shares, more than triple the average turnover.

Apart from AK's problems, however, not a lot was seen happening in the distressed precincts.

Mirant Corp. - whose bonds had been on the rebound for most of the week, following its announcement late Monday that it had filed Chapter 11 after failing to come to an agreement with its bank lenders and bondholders on a consensual out-of-court restructuring - was mostly unchanged on Friday. Its Mirant Americas Generation operating company bonds were holding steady in a context around 75-76, while its parent Mirant Corp. bonds remained around 43-44.

On the bank debt front, Mirant's 2003 bank loan paper was being quoted down about four points over the last two days, with trades taking place on Friday at 421/2, 43 and 431/2, according to traders. The loan traded at 45½ on Thursday.

It's been a rollercoaster week for the Mirant bank debt, following the Chapter 11 filing. The 2003 paper fell to trading levels in the 30s on Tuesday from around 56 on Monday and then picked up a couple of points mid-week - only to start falling again.

HealthSouth bonds were described as "a little weaker" on Friday, with its 10¾% subordinated notes easing to 75 bid, 76 offered from 75.5 bid.77 on Thursday.

A trader assessed them as "down a couple and quiet."

"The bonds are finally getting back to reality" said another trader who saw the troubled Birmingham, Ala.-based outpatient surgery and rehabilitation clinic operator's 12% notes dip to 80 bid, 82 offered from 82 bid, 84 offered on Thursday. "They just continue to drift in."

Some market observers had in fact questioned the recent rise in HealthSouth paper, noting that the company faces daunting challenges, including Securities and Exchange Commission and Justice Department investigations of alleged accounting irregularities as well as a burdensome debt load, particularly near-term maturities, and numerous lawsuits from disgruntled investors. They wonder whether HealthSouth might end up seeking Chapter 11 protection, although the company has steadfastly denied that it is considering such an option.

One company which just this past week went the Chapter 11 route, Loral Space & Communications Ltd., was seen at a distressed-debt house as "trading sideways" Friday, its Loral Orion Corp. 10% notes due 2006 pegged at 63 bid, 65 offered, while its 9½% subordinated notes languished at 29 bid, 30 offered.

At another desk, the Loral 10s were quoted at higher a level of 65, but were seen having fallen a point from Thursday's levels to get there.

Adelphia Communications Corp. debt was seen down a point across the board. UK cabler Telewest Communications plc's 9 5/8% notes due 2006 were up better than a point, but are still trading under 40.

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