HealthSouth Nears Bond Agreement
Pact With 5 Sets of Holders
May Ease Reorganization;
News Could Come This Week
By CARRICK MOLLENKAMP and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
June 7, 2004; Page C5
HealthSouth Corp. is close to an agreement with its bondholders that would pay those investors about $70 million and remove a significant obstacle to the health-care company's ability to reorganize outside of bankruptcy court.
The announcement of a deal could come as soon as this week, according to people familiar with the situation, though negotiations were continuing during the weekend. A HealthSouth spokeswoman declined to comment.
The proposed pact calls for HealthSouth, of Birmingham, Ala., to pay five sets of bondholders between $30 and $45 for each $1,000 in principal. In return, the bondholders, owners of $1.9 billion in HealthSouth debt, would waive their right to accelerate the payment of the debt, a move that could have forced HealthSouth to seek protection in bankruptcy court.
The two sides had been far apart in a game of financial chicken during the past several months, with HealthSouth offering $20 million and the bondholders seeking 10 times as much. Since the Justice Department opened an accounting-fraud investigation at HealthSouth last year, the company has inched its way back from financial ruin. HealthSouth became current on its interest payments, stabilized its cash holdings and operations, and hired a chief executive to replace ousted Chief Executive Richard M. Scrushy.
Because the rehabilitation and surgery provider doesn't expect to file audited financial statements until next year, it remains in technical default on its debt. Some of HealthSouth's seven sets of bondholders, claiming that the default allowed them to accelerate the payment of the debt, have used the default as a negotiating tool to squeeze the company. An Alabama state court hearing on the dispute was set for this month.
The expected agreement doesn't entirely eliminate the threat of bankruptcy. The federal government is continuing its accounting-fraud probe of HealthSouth, and the company still faces litigation from shareholders. Mr. Scrushy has been indicted on 85 criminal counts; he has said he is innocent and that executives who reported to him carried out the fraud without his knowledge.
Earlier this year, HealthSouth boosted its initial offer to bondholders of $10 for each $1,000 in principal to $13.75 per $1,000, if the bondholders would agree to waive the company's various defaults. Two of the seven groups of the company's bondholders accepted the company's offer of $13.75 last month. Five other groups, led by distressed-debt investor Franklin Mutual Advisors, held firm by refusing to surrender their right to speed up payment of the debt. The investors owned bond issues with interest rates between 6.875% and 8.5% and maturities ranging from 2005 to 2012.
Veteran "vulture" investors such as Franklin Mutual buy the debt of financially ailing companies with an eye toward profiting from just this sort of showdown. Franklin helped to organize an unofficial committee of bondholders that represented a majority of each of the holdout bond issues. The committee retained New York lawyer Brad Scheler to spearhead the negotiations.
According to people familiar with the situation, the pending agreement will modify the debt's existing covenants and modify the company's ability to pay the debt back, giving HealthSouth financial flexibility going forward. |
