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HealthSouth May Need $1 Billion To Avoid a Bankruptcy Filing

Mar 24, 2003 | Wall Street Journal

HealthSouth Corp., rocked last week by allegations of massive accounting fraud, may need as much as $1 billion in financing from its banks to avoid a bankruptcy-protection filing, according to people reviewing the company's financial records.

HealthSouth's lawyers and bankers worked over the weekend to determine whether a financial lifeline could be arranged for the Birmingham, Ala., company, which provides outpatient surgery and rehabilitation services through nearly 1,700 facilities in the U.S. and overseas. How much HealthSouth may need won't be completely clear until the lenders get an accurate picture of its financial health.

The Securities and Exchange Commission, in a civil complaint filed last week, charged HealthSouth and its chairman and chief executive, Richard Scrushy, with overstating earnings by $1.4 billion since 1999.

Mr. Scrushy, through his lawyers, said last week that he was shocked at the government's actions, and he has declined to comment further. The company has said it is cooperating with investigators.

HealthSouth said forensic accountants from PricewaterhouseCoopers LLP were hired Friday to begin combing through the company's financial records. Those accountants will be leading the company's internal investigation into the alleged fraud and providing lenders some clarity about the balance sheet, a company spokesman said Sunday.

As part of its complaint, the SEC alleged that HealthSouth overstated its cash by more than $300 million during the second quarter of 2002 and overstated its assets by at least $800 million in last year's third quarter.

There is also the possibility government investigators could allege further fraud and bring more charges because regulatory and criminal probes are continuing. Numerous HealthSouth employees contacted investigators last week after the allegations became public, according to people close to the investigation.

Meanwhile, HealthSouth said a decision on hiring a turnaround firm that could fill key slots such as chief financial officer should be made shortly. The company placed Mr. Scrushy and its chief financial officer, William T. Owens, on administrative leave after the charges were filed last week. A lawyer for Mr. Owens said he was cooperating with government investigators.

Ernie Knewitz, a HealthSouth spokesman, said talks with its lenders were continuing, but declined to comment further. Robert May, a HealthSouth board member named acting chief executive, couldn't be reached for comment. The company reported $3.21 billion of debt as of Sept. 30, according to its most recent quarterly filing.

There was optimism over the weekend that HealthSouth's lawyers were close to resolving the company's most immediate headache, which is an April 1 deadline to repay an estimated $345 million in convertible securities, according to people close to the situation. That solution could be part of a broader financial package arranged to avert a bankruptcy filing or as part of a restructuring under Chapter 11 of the U.S. Bankruptcy Code.

Some banks appear to be considering providing HealthSouth with additional money and time if the company can come up with enough assets to secure a loan and the forensic accounting review provides a solid financial picture, according to these same individuals. On the plus side for HealthSouth, as far as banks are concerned, is that the company had access to the $1.25 billion loan commitment but had drawn only about $420 million before lenders froze the credit line last week.

Last year, WorldCom Inc. faced a similar financial crisis and some of its lenders were less than willing to work with the telecommunications company because it drew down a $2.65 billion credit line a month before WorldCom disclosed improper accounting in the billions of dollars.

A hearing is scheduled for Tuesday in federal court in Birmingham regarding a freeze on Mr. Scrushy's assets. The SEC requested the freeze as the government seeks the return of any "ill-gotten gains" he received from allegedly inflating financial results.

Trading in HealthSouth shares was suspended Friday for the third consecutive day after closing Tuesday at $3.91 a share.

Trading in HealthSouth's bonds resumed Friday and quoted prices on its senior debt had fallen by nearly half to the mid-40s since the accounting allegations were announced. Credit analysts said the company's convertible securities and subordinated notes had dropped into the teens from the mid-80s.

SEC Isn't Expected to Nullify Trades

Debt investors who traded in HealthSouth bonds before the SEC's trading halt last week want the agency to nullify trades that occurred in premarket trading, but the SEC isn't expected to do so.

Investors called the SEC last week, asking the commission to make the two-day halt, which took effect 9:30 a.m. Eastern Standard Time Wednesday, retroactive to midnight. The SEC halted trading in HealthSouth after it alleged the Birmingham, Ala., company engaged in a $1.4 billion accounting fraud.

The halt in trading, which applied to stocks and bonds, was timed to coincide with the opening of U.S. financial markets. But some bond traders had been buying and selling HealthSouth bonds in premarket trading. Those who traded in the bonds before the halt are facing steep losses. HealthSouth's bonds fell about 50 points Friday after the two-day halt was lifted. Those who traded after the halt will have their orders canceled. Some investors say they didn't realize the halt applied to HealthSouth bonds as well as its stock and continued to trade even after the SEC issued its halt.

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