A pair of high-yield healthcare analysts are advising investors to buy HealthSouth bonds, which were subject to heavy selling recently on rumors that the crossover healthcare provider may have accounting-related skeletons in its closet. However, "the rumors don't seem to be well-founded" in the case of HealthSouth, says Susannah Gray, analyst at Merrill Lynch. Another analyst, who dislikes the company because he says it continually reneged on promises to pay down debt in 2001, also believes the bonds will rally. "But then I'd probably short them," he says.
Last Tuesday, HealthSouth's 7.625% notes of '12 (Baa1/BBB-) were bid at a dollar price of 90, equal to a spread of 450 basis points over Treasuries. The $1 billion issue priced in May at a spread of 248 basis points over Treasuries.
Gray says she has always been cautious on HealthSouth for a number of reasons, including its high capital expanditures and its stubbornly high levels of receivables. Nonetheless, she believes investors should buy the bonds and wait for them to improve with the overall market. "Even though it's hard to pound the tables and say 'overweight,' it looks attractive as a trading opportunity at current levels," she says. Gray says she does not want to hazard a guess as to when the bonds will return to trade on a spread basis.