HealthSouth extends consent solicitation for five series of notes; 7% noteholders declare technical default

New York, May 28 - HealthSouth Corp. said it extended its previously announced solicitation of consents to proposed indenture changes and waivers of indenture conditions from the holders of five of its series of notes to 11:59 p.m. ET on June 4, subject to possible further extension, from the previous deadline of 11:59 p.m. ET on May 27.

HealthSouth is continuing to seek the consents and waivers from the holders of its 6 7/8% senior notes due 2005, its 7 3/8% senior notes due 2006, its 7% senior notes due 2008, its 8 3/8% senior notes due 2011 and its 7 5/8% senior notes due 2012, having already received consents from the holders of two other series of notes, as previously announced, its 8½% senior notes due 2008 and its 10¾% senior subordinated notes due 2008.

HealthSouth continues to offer a consent fee to its holders of 1.375% of the principal amount of notes they grant consent for, or $13.75 per $1,000 principal amount, an amount the company calls "commercially reasonable," although its recalcitrant bondholders have deemed it to be inadequate.

The company also said the holders of its 7% notes have served the company with a notice of technical default, relating to HealthSouth's failure to file reports with the Securities and Exchange Commission and with the trustee of its 7% notes. If not cured within 60 days, such a default could permit holders of the 7% notes to accelerate their debt.

The technical default filing follows by several days a similar notice of technical default filed on behalf of the holders of the company's 7 5/8% notes.

As previously announced, HealthSouth, a Birmingham, Ala.-based operator of outpatient surgery, diagnostic imaging and rehabilitative healthcare centers, said on March 16 that it had begun soliciting the consent of holders of record (as of March 15) of seven series of its outstanding notes to proposed indenture amendments and waivers of indenture conditions.

The company initially said the consent solicitations would expire at 11:59 p.m. ET on April 13, although this was later extended several times.

The consent solicitations seek approval of proposed amendments to the notes respective indentures, and waivers under the indentures, in order to address, on a consensual basis, among other things, issues relating to HealthSouth's inability to provide current financial statements.

The company initially said that holders of notes delivering consents and waivers prior to the expiration of the consent solicitations would receive a consent fee of $10 in cash per $1,000 principal amount of notes held (this was later increased). It said the payment of the consent fee would be conditioned upon the proposed amendments to the indentures and the waivers becoming operative.

The company said that the proposed amendments would, as a consensual matter, temporarily suspend HealthSouth's duty under the indentures to furnish compliance certificates to the indenture trustees and to furnish to the SEC periodic and other reports under the federal securities laws, until HealthSouth is able to comply with the reporting requirements.

The proposed amendments, if applicable, also seek to modify HealthSouth's ability to incur certain debt under certain circumstances. Each noteholder who consents to the proposed amendments will also be waiving all alleged and potential defaults under the indentures arising out of events occurring on or before the effectiveness of the proposed amendments.

The proposed amendments will become effective only upon satisfaction or waiver by HealthSouth of certain conditions, including receipt of valid and unrevoked consents from holders representing at least a majority in total principal amount of outstanding notes for a series.

Consent solicitations for series of notes that are governed by the same indentures are also conditioned upon receipt of valid and unrevoked consents from a majority in principal amount of the holders of each other series of notes issued under such indenture.

On April 14, HealthSouth said that that it had extended the deadline on the consent solicitations to 11:59 p.m. ET on April 28, subject to possible further extension, from the originally announced April 13 deadline. On April 29, HealthSouth again extended the consent solicitation, to 11:59 p.m. ET on May 13, subject to possible further extension, from the previous April 28 deadline.

The company also announced that it was increasing the consent fee offered to holders delivering valid and unrevoked consents prior to the expiration of the consent solicitations to $13.75 per $1,000 principal amount of notes for which consents have been delivered.

HealthSouth also announced that it was modifying certain of the terms of the proposed amendments. It said each holder of notes consenting to the proposed amendments would also be waiving all alleged and potential defaults under the indentures arising out of events occurring on or prior to the effectiveness of the proposed amendments.

After receiving consents and waivers from holders representing a majority the 8½% notes and holders representing 89.21% of the 10¾% notes, HealthSouth said it was continuing its efforts to solicit consents from the holders of the other five series of notes - its 6 7/8% senior notes due 2005, its 7 3/8% senior notes due 2006, its 7% senior notes due 2008, its 8 3/8% senior notes due 2011 and its 7 5/8% senior notes due 2012 - and was extending its consent solicitation to 11:59 p.m. ET on May 20, subject to possible further extension, from the previous deadline of 11:59 p.m. ET on May 13.

HealthSouth further said that it was amending the consent solicitations for the 6 7/8% notes, the 7 3/8% notes, the 7% notes and the 8 3/8% notes, to eliminate the condition to each of these solicitations relating to the successful completion of any other consent solicitation. As amended, each of these consent solicitations is independent of the consent solicitation for any other issue of senior notes.

On May 21, HealthSouth Corp. said that it had again extended the consent solicitation among the holders of the five series of notes that had not yet consented to the indenture changes and waivers, to 11:59 p.m. ET on May 27, subject to possible further extension, from the previous deadline of 11:59 p.m. ET on May 20.

On May 25, HealthSouth said it had received a notice of technical default on behalf of the requisite holders of its 7 5/8% notes for the company's failure to file reports with the SEC and with the trustee for the notes; if not cured within 60 days, such a default could permit holders of the 7 5/8% notes to accelerate their debt.

HealthSouth said it was seeking to prevent acceleration of its debt through pending litigation, with a hearing on the company's motion for partial summary judgment scheduled for June 30 before judge Allwin Horn III of the Circuit Court of Jefferson County, Ala.

In the meantime, HealthSouth said it was continuing its talks with the 7 5/8% bondholders and the holders of the other series of bonds for which it is seeking indenture changes and default waivers, in hopes of reaching a resolution of the matters.

Credit Suisse First Boston is the solicitation agent for the consent solicitation (call 800 820-1653) Innisfree M&A Inc. is the information agent (banks and brokers call 212 750-5833; noteholders call 888 750-5834).

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