Magellan gains another lender extension

Mental health insurer may write down hundreds of millions on acquisitions

January 03, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

Still seeking to restructure its debt, Magellan Health Services Inc. has received another extension from its lenders, and expects to take a write-down of hundreds of millions of dollars when it issues its next financial report.

The Columbia mental health insurer estimated in a filing with the Securities and Exchange Commission that it would have $16 million to $20 million in net income for the fiscal year that ended Sept. 30. That compared with $24.6 million the previous year.

The estimate does not include a write-down for a decline in the value of companies it acquired. The write-down, Magellan said in this week's filing, is likely to be $350 million to $700 million.

A sizable write-down has been expected for some time as new accounting standards went into effect, but this is the most detailed indication yet of its magnitude.

All the amounts are unaudited so far, Magellan wrote in the filing.

Also, Magellan said in the filing that its year-end report would be delayed because its finance staff has been tied up with the debt restructuring.

Magellan grew rapidly through acquisitions in the late 1990s, roughly tripling in size. It now provides mental health benefits for about 68 million Americans, making it by far the largest company in its field.

It financed the acquisitions by borrowing, and its debt topped $1 billion. Magellan's loan agreements require it to meet certain ratios of earnings to debt, but as medical expenses rose, it fell behind the benchmarks set in the loan agreement. That means the bank lenders could demand accelerated payments, which analysts say would almost certainly mean bankruptcy.

At the end of October, as Magellan first fell below the ratios in its agreement, the lenders gave it an extension until the end of the year. On the same day, its chief executive officer announced his departure; a replacement was named last month.

On New Year's Eve, the company announced another lender extension, to Jan. 15.

"We are pleased that the progress of our efforts has been such that we have secured an extension to our interim waiver from our bank lenders," Mark S. Demilio, chief financial officer, said in a statement.

"We believe that, with continued progress, we can obtain further waivers, as appropriate."

Kristin Brunnworth, a Magellan spokeswoman, said yesterday that there was "no particular significance" to the fact that the new extension is for two weeks, compared with the two months of the original extension.

Magellan shares gained 2 cents in over-the-counter trading yesterday to close at 18 cents.

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