HealthSouth drops as forbearance expires; Tyco nudged lower; energy continues surge

By Carlise Newman

Chicago, May 1 - HealthSouth Corp. debt plunged Thursday after the company's forbearance agreement with its credit facility lenders expired Thursday and it failed to make interest payments on its debt.

The company said it remains in discussions with lenders and noteholders and believes they will continue to work with the company while PricewaterhouseCoopers and Alvarez & Marsal complete a review of HealthSouth's financial condition (see story elsewhere in this issue).

HealthSouth's 7 5/8% notes due 2012 fell four points 60 bid/64 offered Thursday, erasing the gains it had accrued Wednesday, when it was seen at 64 bid/68 offered. HealthSouth's bank debt "was stable, still in the mid-60s."

HealthSouth said it has not entered into a new forbearance agreement with the lenders under its credit facility, or with the holders of any other indebtedness, and cannot guarantee that any of its lenders, noteholders or other creditors would not seek legal action.

The company said that its board of directors, together with outside advisors, is working to maintain the stability of its operations.

"It could have been worse," said a distressed debt trader. "The bonds could have really been run down, but this event was pretty much expected."

HealthSouth, a Birmingham, Ala.-based operator of rehabilitation clinics and surgery centers, on March 27 was declared in default under its $1.25 billion credit facility in the wake of an accounting scandal that has led to 11 former executives admitting guilt to fraud charges. The credit facility has been frozen and HealthSouth cannot access additional funds.

On Wednesday HealthSouth's bonds zoomed ahead as the market digested a letter contained in a filing with the SEC, saying that it has enough funds to support its operations and adequate insurance for the doctors.

Tyco International Ltd.'s debt saw slight losses Thursday, reacting to accounting charges that were announced Wednesday and a loss for the second quarter instead of an expected profit.

Tyco's 6 3/8% notes due 2011 were quoted bid at 97 and offered at 98, "about a point lower" than Wednesday, according to a trader. The bank debt was quoted at 95½ bid/97½ offered, a quarter point lower than Wednesday.

On Wednesday, the bonds barely moved, quoted at 98 bid, about the same level as Tuesday despite the accounting news, a trader said.

The accounting charge totaled $997.4 million on a pretax basis, or 55 cents a share. The figure included $265 to $325 million previously announced. Tyco also had a $364.5 million charge for a change in amortization method at its ADT unit.

Tyco reported a loss from continued operations of 23 cents a share compared with a loss of $1.03 a share a year ago. The company also reported revenue of $9 billion for the quarter, surpassing the consensus of $8.9 billion compared to Tyco brought in $8.6 billion in revenue

In addition, the Pembroke, Bermuda manufacturing and services company reported that free cash flow rose to $833 million in the second quarter, higher than the $568 million in the same period a year ago, and above the company's estimates of $450 million to $750 million.

Traders were puzzled Wednesday as to why Tyco held steady when it had released negative news, and surprised Thursday that the bonds had not fallen further.

"The cash flow helped," said a distressed debt trader of Thursday's activity. "But I don't think this is the last of their troubles."

The upsurge in energy debt was not quelled Thursday.

Mirant Corp.'s bonds continued their run higher, with the 7 5/8% notes due 2006 rising two points higher to 87 bid/89 offered from 85 bid/87 offered at Wednesday's close. The company's 8.30% notes due 2011 were quoted at 74 bid/74 offered, also two points higher from Wednesday's levels, according to a trader. Both issues had been "a good five or six points higher" on Wednesday.

"There's really no stopping energy. It's amazing. The news has all been good. They're just flying," said a trader.

Atlanta-based Mirant had delayed reporting financial results and making its annual report filing, including results for two subsidiaries, pending completion of a re-audit of its books for 2000 and 2001 and an audit of its 2002 financials. On Wednesday it reported a net loss of $2.4 billion, or $6.06 a share, for 2002. That compares to $409 million, or $1.19 a share, in restated net income for 2001.

But the Atlanta-based electric utility also said it found no evidence of fraud in the audit, which has boosted the bonds.

Dynegy Inc.'s 8¾% notes due 2012 also "ran up like crazy the last few days" according to a trader, who saw the bonds "up two, two and a half points" at 97 bid/98 offered. Dynegy's bank debt was also seen at Wednesday's levels of 96 bid/98 offered.

Dynegy reported a quarterly profit for the first time in more than a year on Tuesday. The Houston-based energy utility posted net income of $147 million versus a net loss of $247 million in the year-earlier period.

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