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 overstating its earnings by $1.4 billion in order to meet earnings expectations. Immediately following the news, bank debt levels sank from the 85 context alongside the company's bonds to the 45-50 range. By Friday morning, however, the bank debt was quoted at a 10-point premium to the bonds due to net payments from the letters of credit that market players expect the bank debt to receive. No bank debt trades could be confirmed, but the bonds traded in high volumes from 45 to 49-50 and some expected them to climb up after the purging stopped. A company spokesman said he could not comment.
Market players indicated that HealthSouth triggered a material adverse clause, which froze access to the $1.25 billion revolver. They estimated that $250-400 million of the revolver was drawn, compared to $150 million drawn at the end of September. While lender losses would be drastically limited if the company did not have access to the undrawn amount, traders were not ready to count on receiving the unfunded portion back. Despite reports that the company was in talks with its banks to put a new line in place of the frozen revolver, traders said it was too early to tell what kind of deal would come out. "I think that the company is examining what to do. I think this took everyone by surprise," one dealer said. Getting security on bank debt could be difficult as the company's bonds carry negative pledge clauses that could prevent it from handing over additional security, an analyst said.
HealthSouth received the new five-year 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. Other tweaks to the bank debt would have included the terming out of $400 million and a reduction in the nominal amount on the company's revolver. In the near term, those following the company are worried that HealthSouth will not be able to meet its current obligations. "Obviously, our concern is that there would be an interruption of payment," said Diana Lee, v.p. and senior credit officer at Moody's Investors Service, referring to the April 1 maturity on the company's convertible notes. Calls to the company and officials at J.P. Morgan were not returned. A Wachovia official declined to comment.
Levels for HealthSouth's bank debt began to soften at the end of August as the company became the subject of a number of class actions law suits. The levels then took a nosedive into the low 70s as HealthSouth disclosed it was the subject of a SEC investigation, but climed back into the mid-80s context.