Levels for HealthSouth Corp.'s bank debt plummeted roughly 30 points after reports indicated the Securities and Exchange Commission has charged the company and Richard Scrushy, its chairman and ceo, with massive accounting fraud. Traders said the bank debt is pari passu with the company's bonds, which were quoted in the mid-80s yesterday, but have since sunk to the 45-50 context after the civil case was filed. No trades could be confirmed. The charges indicate that HealthSouth overstated its earnings by $1.4 billion since 1999 in order to meet earnings expectations.
HealthSouth received a new five-year, $1.25 billion revolver in June. The company and its bank group, led by J.P. Morgan and Wachovia Bank, had been negotiating an amendment to this line before the alleged fraud was announced, according to market sources. This amendment would have granted the banks extra security through a springing lien, one trader noted. Calls to the company and officials at the two banks were not returned.
Fleming Companies bank debt has recovered slightly since the company hosted a bank call last Friday. A piece of the term loan traded in the 92 context up from the 85-90 range where it fell last week. Market players said the call helped to calm investors by assuring them that Fleming's liquidity situation is not as dire as some expected and that management was still pursing steps to de-lever via asset sales. Moreover, rumors suggest that there is still an asset-backed lender, possibly General Electric Capital Corp., on the periphery that will step up with a deal. Calls to Mark Shapiro, senior v.p. of finance and operations control, were not returned by press time.
A $10 million piece of Hayes Lemmerz International's bank debt is believed to have traded in the 75 range this week. Dealers said the market for the auto parts maker slumped as investors look for pressure on the auto sector. Hayes Lemmerz is particularly susceptible because a large portion of the recovery coming to lenders when the company emerges from bankruptcy is said to be comprised of equity. Calls to the company were not returned by press time.