Bankruptcy is closing in on Magellan

Deadline arrives for accord with lenders

Thousands of jobs at stake

January 16, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

Magellan Health Services Inc. reached a deadline with its lenders yesterday, but had no announcement last night on whether it had reached an agreement or been granted another extension.

Without an extension on its debt agreements, the Columbia-based mental health insurer could be forced into a bankruptcy filing, it had said in a filing Tuesday with the Securities and Exchange Commission.

And even if it reaches agreement with some of its lenders to accept company stock in exchange for debt, Magellan said, it is most likely to accomplish such a restructuring through a voluntary bankruptcy reorganization filing.

FOR THE RECORD - A headline in the Business section of yesterday's editions of The Sun referred erroneously to the prospect of thousands of jobs being at stake in bankruptcy proceedings involving Magellan Health Services Inc. The company said that, should it file for bankruptcy, it plans to maintain normal business operations while it reorganizes. The Sun regrets the error.

If that happens, the company said in a statement released with its SEC filing, "our providers, customers and employees [would] continue receiving timely payments, without interruption," as the company completes its reorganization. Magellan employs about 900 in Columbia and nearly 6,000 nationally, and provides mental health coverage to 68 million people.

The outline of a potential debt restructuring in the SEC form 10-K filing indicates that the company is probably close to a deal with its lenders, said Thomas H. Shinkle, a high-yield debt analyst at Imperial Capital LLC in Beverly Hills, Calif.

"They wouldn't put all that stuff in the 10-K unless they were getting there," Shinkle said, "but there's a lot of crossing T's and dotting I's in these agreements."

The potential restructuring calls for lenders to accept "substantially all the equity in the company" in exchange for $625 million in subordinated debt. That would mean that current stock, which closed yesterday at 8 cents a share, would be worth even less. Other lenders and Aetna Inc., which is owed money for a subsidiary it sold to Magellan, also would renegotiate the terms of their debt.

Such an agreement takes time, Shinkle said, because different lenders have to agree on changes to interest rates and payback schedules.

Magellan built up about a billion dollars of debt as it made a series of big acquisitions in 1997 and 1998, becoming by far the largest company in its field.

Although Magellan's revenue has been running ahead of its operating costs, the company is facing a problem meeting debt payments, some due as early as next month.

It said in the SEC filing, "Although the company believes it has sufficient cash on hand to meet its current operating obligations, the company does not have sufficient cash on hand or capacity to borrow under its credit agreement to pay scheduled interest and to make contingent purchase price payments." The "contingent purchase price payment" due next month is $60 million to Aetna Inc., the last payment stemming from Magellan's acquisition of Aetna's mental health division.

Magellan has been public about trying to restructure its debt for months. Its loan agreements called for it to improve its ratio of earnings to debt over time.

As earnings remained flat, Magellan failed to meet those terms at the end of September. Lenders agreed to a two-month extension Nov. 1, the day Daniel S. Messina announced his resignation as chief executive officer. A second extension, this month, pushed the deadline back to yesterday.

Mort Faller, who heads the bankruptcy practice at Shulman, Rogers, Gandal, Pordy & Ecker, a Rockville law firm, said lenders will sometimes agree to trade debt for stock rather than seek a forced bankruptcy, because they expect "a greater return on their investment."

Shinkle said the subordinated debt holders were likely to get nothing if the company were liquidated.

Faller said companies facing bankruptcy find it advantageous to make arrangements in advance with key lenders because "when a debtor goes into bankruptcy, it's very helpful to have allies." In addition, pre-negotiated arrangements generally allow for faster emergence from bankruptcy reorganization, he said, emphasizing that he was speaking about general bankruptcy procedures, not commenting specifically on Magellan.

In its 10-K filing, Magellan also reported its results for the fiscal year, which ended Sept. 30. It posted what it calls "segment profit" -- essentially earnings before non-cash charges -- of $180.8 million for the fiscal year, down from $235 million in 2001.

However, Magellan wrote down $415.9 million for the quarter, in effect recognizing that the company is worth less than it used to be.

Counting all noncash charges and discontinued operations, Magellan booked a loss of $734.3 million, or $21.07 per share. That compared with earnings of $19.5 million, or 72 cents a share, in the previous fiscal year.

Revenue was flat at $1.8 billion. In the filing, Magellan said its revenue from its key Aetna contract was $250.3 million, down $65.3 million, or 25.9 percent, from the previous year as Aetna reduced its membership by dropping poorly performing contracts. Further drops in Aetna membership are likely this year, Magellan said.

Steven J. Shulman, who was named the new CEO last month, said in a statement released with the SEC filing, "Once we complete the work we're doing to reduce our debt ... we'll also free up an enormous amount of management time, energy and attention. ... We're looking forward to what we can accomplish once that issue is behind us."

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