Healthsouth, airlines higher; Esterline, Dayton Superior price; Williams upsizes

By Paul Deckelman and Paul A. Harris

New York, June 4 - Healthsouth Corp.'s battered bonds made an impressive recovery Wednesday, as traders cited all kinds of rumors swirling around the embattled Birmingham, Ala.-based provider of diagnostic imaging and rehabilitation services. Also on the upside, airline bonds seemed to be gaining altitude, along with their shares, after Goldman Sachs put out an optimistic assessment of the troubled industry's prospects.

The primary market cranked up its activity level during Wednesday's session as two upsized deal rolled off the block.

And on the subject of upsizings, Williams Cos., the Tulsa, Okla. natural gas firm that had been in the market with $500 million of seven-year notes, ballooned its deal up to $800 million Wednesday and issued 8 5/8%-8 7/8% price talk on the offering that is said to be significantly oversubscribed and set to price on Thursday.

Also during Wednesday's session three companies showed up at the primary market with new junk bond deals, two of which are expected to be completed before the finish flag falls on Thursday.

As Wednesday's session was gathering its momentum one investor, who spoke to Prospect News on background, said that the recent outflows from high-yield mutual funds, the pulled and delayed deals, and the smattering of transactions heard to be completed at the wide end of price talk represent a correction, and do not necessarily portend a negative turn in the rally.

"The market may have slowed a little bit but I think we're in the middle of our second-quarter seasonal correction, which we see every year," said the buy-sider. "I think this year it will be mild - not like last year, because the economy is still expanding and defaults have come down materially. A year ago they were at 10%, and now they are under 7%. And I think that it's clearer that the economy is going to do better.

"Whether we have people taking money off the table because they have made so much money in the sector for the first time in a number of years and are being a little cautious, to me this has just been a mild correction in the context of spreads becoming narrower.

"I think that over the course of the year spreads will continue to narrow from these levels," the portfolio manager added. "Right now it's still above average. I think they will go below average."

This investor allowed that 12 consecutive weeks of inflows to high-yield mutual funds taken in conjunction with a reportedly huge allocation to the asset class on the part of pension funds and insurance companies may have tempted the investment banks to push the credit envelope and bring some lower-tier issuers into the market. Nevertheless, business remained comparatively orderly.

"You see a smattering of lower-tier credits because the demand for yield is so high and the market has been more receptive," said the investor. "So we've seen some smaller companies come into the market and some troubled companies. But it's nothing like 1998, when just anyone could come to the market at very narrow spreads.

"And there's nothing like performance to make people want to take more risks," added the source. "But fundamentally the background has improved. It has been months and months since we've had a major high profile bankruptcy. I think United Airlines was the last one. It looks like all the airlines have at least muddled through to date. The troubled utilities look like they have been able to sell off assets. And other companies that maybe were squeezed by their bank lines have been able to come into the market and issue debt to pay off those bank lines.

"Those are all good things."

During Wednesday's primary market session two upsized junk bond deals were priced, according to market and syndicate sources.

Esterline Technologies Corp. increased its offering to $175 million from $150 million and sold its new 10-year senior subordinated notes (B1/B+) at par to yield 7¾%. Notably, the Wachovia Securities-run deal came at the tight end of the 7¾%-8% price talk.

And on Wednesday Prospect News learned that terms had emerged Tuesday night on an upsized offering from Dayton Superior Corp. of $165 million 10¾% five-year senior second secured notes (B3/B+). The Dayton, Ohio-based construction materials manufacturer's new notes priced at 98.088 to yield 11¼%, at the wide end of the 11%-11¼% price talk. They were increased from $150 million. Morgan Stanley and Deutsche Bank Securities ran the books.

Three new deals came into view Wednesday - two of them quick-to-market offerings.

Old Greenwich, Conn.-based independent petroleum refiner and marketer Premcor Inc. announced plans to sell $250 million of 12-year senior notes in a Thursday drive-by, via Morgan Stanley.

And SPX Corp., a Charlotte, N.C.-based provider of industrial and technical products and systems, expects to price $200 million of eight-year senior notes (BB+) in a quick-to-market transaction that is also expected to price Thursday. Price talk is 6 3/8%-6½% on the deal that is being led by JP Morgan.

Meanwhile Omnicare, Inc., a Covington, Ky.-based provider of pharmacy and related services to institutional health care facilities, was heard to be on the road with its $250 million of new 10-year senior subordinated notes (Ba2), which are expected to price early during the week of June 9.

Lehman Brothers, JP Morgan and UBS Warburg are joint bookrunners.

And news surfaced Wednesday on several deals that have been on the road.

Price talk of a yield in the 11½% area emerged Wednesday on R.J. Tower Corp.'s $250 million of 10-year senior notes (B1), which are expected to price on Friday via JP Morgan and Banc of America Securities.

And the price talk is 8¾%-9% on Warnaco Group, Inc.'s $210 million of 10-year senior notes (B2/B), which are set to price on Thursday via Citigroup and JP Morgan.

However a good deal of market chatter on Wednesday centered on news that surfaced on a deal in the market from Williams. The company upsized its new seven-year senior notes offering (B3/B+) to $800 million from $500 million and issued price talk of 8 5/8%-8 7/8%.

The deal, which is expected to price on Thursday, via Lehman Brothers, Citigroup, JP Morgan and Banc of America Securities, is reported to be significantly oversubscribed.

"Williams will get done Thursday, like crazy," said one sell-side source. "It will be a feeding frenzy. They bumped it up to $800 million and it wouldn't surprise me a bit if there was $1 billion of orders in the book.

"This market is hard to read but it looks pretty good so far," the official added. "I think that some of the deals that got pulled and got delayed were really just pushing the envelope."

Another sell-side official who spoke to Prospect News late on Wednesday said that the high-yield market, in spite of its recent choppiness, continues to provide attractive interest rates for companies that need to borrow money.

"This market has still got some steam and there's still a lot of money around," said the source.

"We took the inflows for granted for a while and people anticipated that a negative flow would mean bad things. All it really means is that the day that the flow number comes out it's a little bit tougher to get really tight pricing. It might change people's minds a little but it doesn't mean that the market is going to grind to a halt.

"Even if the market pulls back yields are still very attractive right now, relative to what it could be historically."

When the new Esterline bonds were freed for secondary activity, a trader said: "They were very well bid for." He quoted the new notes as having traded as high as 103 from their par issue price, before going out at 102.75 bid, 103.75 offered, "and we've got buyers."

He also saw several other relatively recent new issues were also well bid for, with the Dex Media East LLC 9 7/8% senior notes due 2009, which had priced last fall at par and then proceeded to climb sharply were "back up around 120 again," while Vivendi Universal's 9¼% senior notes due 2010, which priced at par on April 3, hovered around 115.

Other recently priced issues seen trading at premiums to their par issue price include Titan Corp.'s 8% senior subordinated notes due 2011 at 102.25 bid, 103.25 offered; Rhodia's 7 5/8% senior notes due 2010 at 102.5 bid, 103.5 offered, and 8 7/8% senior subordinated notes due 2011 at 101 bid, 102 offered; Triton PCS Inc.'s 8 ½% senior notes due 2013 at 104.75 bid, 105.5 offered; Transmontaigne Inc.'s 9 1/8% senior subordinated notes due 2013 at 103 bid, 104 offered; and Hayes Lemmerz International Inc.'s 10½% seniors due 2010 at 103 bid, 104 offered.

Back among the existing issues, market participants said that Healthsouth bonds "were up big time," in the words of one trader, "though I don't know why. There were a lot of rumors out there - none of which make sense to us."

He saw the company's 7 5/8% notes due 2012 trading as high as 77 bid before going home at 75 bid, 77 offered - still well up from prior levels in the upper 60s.

At another desk, the company's 8 3/8% notes due 2011 were seen having risen to a more restrained 72 bid from prior levels at 68.

Healthsouth's 7 3/8% senior notes due 2006, its 7% seniors due 2008 and 8½% senior notes due 2008 were all seen trading around the 76.5 bid, 78.5 offered level, well up from levels in the upper 60s. Its 10¾% subordinated notes due 2008 had moved up to about 39 bid, a two-point rise.

He saw the issues "thinly traded - there's no bonds offered [for sale] out there.

He said that the buzz making the rounds ran the gamut from "who's gonna buy them, to the numbers are going to be a lot better than everyone expects, to they're gonna avoid bankruptcy." On the other hand, he offered, "maybe they've got a pre-pack [pre-packaged bankruptcy deal] going somewhere."

Healthsouth has been on the ropes for many weeks now, brought low by accusations of alleged accounting fraud, which have led to the indictments of a number of present and former executives, including five former chief financial officers, who were among 11 Healthsouth figures who pled guilty to charges of having participated in the financial irregularities. Former CEO Richard Scrushy - who was ousted from his leadership role several weeks ago - is under government scrutiny, although he has not been charged with any wrongdoing.

The company's shares have been beaten down to penny-stock levels, while its bonds, which once traded at or around par, initially lost more than half of their value before stabilizing and starting to claw their way back upward.

There has been talk of a possible bankruptcy filing - a notion so far resisted by management - and talk as well that all or parts of the company are up for sale. The Dow Jones News Service, for instance, reported on Monday that Birmingham businessman Daryl Harms, owner of venture-capital fund Masada Resources Group, is directing a buyout effort.

On Friday, Healthsouth said in a filing with the Securities and Exchange Commission that it had sent letter to its employees to update them on the company's situation. In a nutshell, the letter reassured the employees that the company remains financially solvent. With ongoing operations generating positive cash flow, the company management said in the letter, "the bottom line is that HealthSouth has a healthy core business - both clinically and financially."

It said that in the meantime, Alvarez & Marsal, the turnaround firm Healthsouth hired after the scandal broke, was making progress in fixing the company's problems. And the letter said that the forensic review of the company's finances being conducted by the auditing firm of PriceWaterhouse Coopers should be largely completed by month's end, with PwC hoping to have new financial statements ready sometime after that.

All fine and well, but said a trader, big deal.

"This is non-news," he declared, dismissively. "We knew that at the end of the month, they're going to come out with audited numbers. They have liquidity because they're not paying any coupons, and their cash flow-EBITDA is not surprising either.

"It's non-news, and it makes no sense to me - but we'll see."

Another trader essentially agreed that the contents of the company's letter was just so much "company spin."

He said that he would find it "very hard to believe" that Healthsouth would be able to extricate itself from its current predicament intact and whole.

For one thing, he noted, "they're going to face an enormous fine" from the SEC.

"Are all of these things figured in [to management's current assessment]? I don't know. Who knows if they're cash flow positive? What does that mean? I'm skeptical."

Referring to ousted CEO Scrushy, the trader declared that "when you're hiding stuff and deliberately defrauding people for 15 years, this is not something where you just wake up and everything is fine the next day. They're making up the numbers. I think they're going to have to file [for bankruptcy].

"I think a lot of people are hoping against hope, but I don't think they can avoid bankruptcy."

Elsewhere, the air carriers - at least one of whom has been mentioned as a possible future bankrupt - were up solidly on Wednesday, after equity analysts for Goldman Sachs and J.P. Morgan suggested that the nascent economic recovery could benefit the hard-pressed carriers.

After Goldman analyst Glen Engel said he saw "significant' upside in the stock of AMR Corp., and Morgan's Jaime Baker touted AMR and Northwest Airlines as potential sector leaders, the shares of those carriers, and peers Continental Airlines and Delta Airlines, all shot skyward. AMR led the pack with a 22% gain.

On the bond side, AMR was "up big," a trader said, its 9% notes due 2012 up five points, to 58 bid. Continental's 8% notes due 2005 were up more than three points on the session, at 87.5 bid, while Northwest's 7 7/8% notes due 2008 were 3½ points better, at 79 bid. Delta's bonds were quoted up about a point-and-a-half on the session.

Back on the ground, Calpine Corp. - whose debt retreated sharply on Tuesday in response to a Standard & Poor's ratings downgrade for the debt-laden San Jose, Calif.-based independent power generator - was bouncing back on Wednesday. Its 8½% notes due 2011 were quoted up nearly five points at 69.25 bid. Its 8 5/8% notes due 2010 rose four points, to 69.5.

OM Group - up several points Tuesday on news that it will sell its precious metals group and put the $700 million net proceeds toward debt reduction - remained on the upside Wednesday, its 9¼% notes due 2011 ending a point higher, at 94 bid.

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