Subsidiary problems led to delay in loan extensions, Magellan says

It fears forced bankruptcy if denied another waiver

January 17, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

Regulatory action to control the assets of its Tennessee subsidiaries has delayed an extension of its loan agreements, Magellan Health Services Inc. said yesterday.

The Columbia-based mental health insurer has been trying for several months to restructure its $1 billion worth of debt. Since the end of September, it has been out of compliance with loan agreements that call for it to improve its ratio of earnings to debt, but its lenders have granted two extensions. The second expired Tuesday.

Without another extension, Magellan warned, it could be forced to file for bankruptcy. Even with an extension, it hopes to get lenders to agree to convert $625 million of debt into stock in the company. The conversion would be put into effect through a voluntary bankruptcy reorganization filing. Such an agreement would make current common stock nearly worthless.

In its statement yesterday, Magellan said it believed it "would have obtained an extension of the prior waiver" if not for the Tennessee problems. It said it is trying to resolve its Tennessee issues and is continuing to meet with lenders to get another waiver.

Regulators in Tennessee have taken action recently against two Magellan-related companies which provide mental health coverage for 1.3 million people under the state's Medicaid program, called TennCare. Both are under "administrative supervision" to provide "heightened oversight," said Michelle Rodriguez, communications director for the Tennessee Department of Commerce and Insurance.

The department appointed a supervisor for both, and prohibited them from taking such actions as signing new contracts, changing premiums or disposing of property without permission. Both continue, however, to operate, paying claims as mental health care is given to TennCare enrollees. An order issued by the department Dec. 30 found that one of the companies, Premier Behavioral Systems - which is half-owned by Magellan and half by the Nashville-based for-profit hospital chain HCA Inc. - does not meet minimum net-worth requirements.

Another order, issued Jan. 9, said that Magellan's wholly owned subsidiary, Tennessee Behavioral Health Inc., had paid $7 million to Magellan in October without notice to Tennessee regulators, which violates state rules. Also, the order said, Magellan "has reported hazardous financial conditions," justifying tighter control by the regulators.

Erin Somerset, a Magellan spokeswoman, said the company was working to resolve the situation in Tennessee while continuing talks withs lenders. "We're working through these issues," she said, "and it's not appropriate to try to gauge a timeline."

Without the formal extension, she said, "We have the informal cooperation of our lenders and noteholders."

If the company does file for bankruptcy, she said, it plans to operate as usual while it completes its reorganization. "To serve our customers," she said, "we need to maintain our employee base and to protect the interests of employees and providers."

Payroll reduced

She said the company has reduced its payroll by both attrition and layoffs as it sought to bring costs down, but that no further reductions are planned. Magellan has about 900 employees in Columbia and about 5,800 nationally.

The company's revenue, about $1.8 billion for the year that ended Sept. 30, exceeds its operating expenses. However, the company said in a filing this week with the Securities and Exchange Commission that its cash flow "can no longer support its existing capital structure" and it might have trouble making future debt payments, including $60 million due to Aetna Inc. next month.

`Very competitive'

Todd Richter, an analyst with Banc of America Securities, said of Magellan's efforts, "Obviously, they've got to restructure the balance sheet. Still, that doesn't get around the issue that it's a very competitive business," and the company will not have an easy time of it even if it does restructure its debt.

The company has seen costs rise as more people seek mental health treatment. However, it has multiyear contracts with HMOs, employers and governments, so cannot easily raise its prices.

Magellan shares closed yesterday at 7 cents, down a penny.

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