MOODY'S DOWNGRADES MAGELLAN HEALTH SERVICES' RATINGS: SR SUBORDINATED RATING TO B3
New York, 01-30-98 -- Moody's Investors Service has downgraded its ratings on the existing debt of Magellan Health Services, Inc. (Magellan) to B2 from B1 for senior unsecured debt and to B3 from B2 for senior subordinated notes. At the same time, Moody's assigned a B3 to the company's proposed $400 million senior subordinated notes and a B1 to a new $900 million bank credit facility. The subordinated notes are being sold in privately negotiated transactions without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issues have been designed to permit resale under Rule 144A. Proceeds from these financings will be used to complete the company's acquisition of Merit Behavioral Care Corporation (Merit) and refinance substantially all existing debt. Total purchase price for Merit is $750 million which includes approximately $300 million of debt to be refinanced. Merit's ratings of B2 for bank debt and Caa1 for senior subordinated notes have been confirmed. Moody's notes that in conjunction with the acquisition of Merit, Magellan is restructuring its debt through a tender offer for the existing subordinated debt of both Magellan and Merit. In addition, the company's Eurobonds have been called. Ratings on these issues will be withdrawn following completion of these transactions. These rating actions complete Moody's review which commenced on October 27, 1997.
Magellan Health Services - B1 senior secured bank facility.
Magellan Health Services - B2 from B1 Eurobonds; B3 from B2 senior subordinated notes.
Merit Behavioral Care Corporation - B2 senior secured bank facility; Caa1 senior subordinated debt.
Moody's ratings incorporate additional risks which are associated with the company's high leverage and the integration of several recent behavioral managed care acquisitions, including HAI and Merit. Although last year's transaction with Crescent reduced Magellan's exposure to the problems experienced on the inpatient psychiatric-side of the business, the company has been affected by lower than anticipated franchise fee payments and will continue to experience revenue pressures in this area. Nevertheless, the company pursues a transformation from a provider-based company to a behavioral and specialty-care managed care company. While Magellan benefits as the clear leader in provision of managed behavioral care services with a significant presence in the risk-based product area, the managed care industry is changing rapidly and is under significant pressure. To be noted, Magellan's niche status and vendor-like relationship with non-specialty managed care companies provides some differentiation but also adds risk due to high dependence on one sector. Also, while new federal regulations requiring that employer benefit plans offer mental health services on parity with medical services may fuel growth in overall behavioral premiums, it may also expose Magellan to managing greater risk associated with a more complex array of benefits.
The company's acquisition of Allied Health Group signifies its desire to develop a presence in other specialty managed care markets. Moody's believes that management's ability to transfer skills from behavioral managed care to the medical/surgical specialty area will prove challenging in light of greater complexity in network development and care management.
Moody's notes that while collateral backing the senior secured bank facility includes stock ownership and all assets including receivables and cash, these assets do not represent sufficient security to cover all bank payments under a stress scenario.
Magellan Health Services, Inc. headquartered in Atlanta, Georgia, is the nation's largest specialty care managers. Following the consummation of the acquisition of Merit, the company will manage the behavioral care of over 56 million lives with an additional 3.4 million members covered under non-behavioral/specialty contracts. Its joint venture company, Charter Behavioral Health Systems, is the nation's largest provider of behavioral care. The company's 88 domestic facilities provide a full continuum of care, including inpatient, outpatient and partial hospitalization programs.
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