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23 May 2006
MOODY'S INVESTORS SERVICE CHANGES MAGELLAN HEALTH SERVICES INC. RATINGS OUTLOOK TO POSITIVE FROM STABLE AND AFFIRMS THE EXISTING RATINGS (CORPORATE FAMILY RATING AT B1)
Approximately $200 Million Face Value of Affected Debt
New York, May 23, 2006 -- Moody's Investors Service changed the ratings outlook for Magellan Health
Services Inc. ("Magellan") to positive from stable,
reflecting a decline in leverage over the past two years. Moody's
noted that the company has reduced total debt outstanding from over $350
million at the beginning of 2004 to $63 million at December 31,
Moody's affirmed the following ratings:
Senior Secured Bank Credit Facility, rated B1
Corporate Family Rating, rated B1
The ratings outlook reflects Moody's expectations that Magellan
will generate between $125 million to $150 million in operating
cash flow and $100 million to $125 million in free cash
flow during 2006. Moody's anticipates that the company will
use its cash flow to retire debt while continuing to rebuild its cash
position, which totals $197 million as of March 31,
2006. Moody's estimates that the company will have approximately
$265 million to $300 million of unrestricted cash by December
31, 2006 if it does not make any significant acquisitions.
In the first quarter of 2006, Magellan spent $120 million
to acquire all of the stock of National Imaging Associates ("NIA"),
a privately held radiology benefits management firm based in Hackensack,
New Jersey. NIA manages diagnostic imaging services on a non-
risk basis for its through contracts with health plans customers,
which totals covering approximately 17 million members.
Moody's believes that Magellan can generate more revenue for NIA
by cross-selling radiology benefit management services to Magellan's
existing behavioral health client base, moving some contracts to
a risk basis, and adding new contracts. Magellan's
expertise in underwriting claims payment and provider network management,
along with its financial resources and information systems should facilitate
NIA's product expansion and transition to risk-based contracts.
The acquisition allows Magellan to manage a larger portion of the healthcare
dollar for its clients while improving its diversity and mix of revenues.
Moody's is concerned, however, that neither Magellan
nor NIA has any experience in managing risk based radiology benefits for
customers. Moody's is skeptical that the Magellan can generate
meaningful growth in its core behavioral business because of the maturity
of the business, increasing competition from managed care providers
such as United Health and others, the potential loss of the WellPpoint
contract in 2008, the continued threat that managed care customers
will in-source behavioral health services, and the restructuring
of the existing Tennessee contract. Moody's expects the company's
revenues to decline by 5% to 10% in 2006 with the loss of
its Aetna contract (almost 15% of 2005 revenues), in addition
to other contracts with existing customers.
Due to slower growth in its core behavioral health business, Moody's
believes that the company will make acquisitions in the radiology business
and other areas to diversify its revenue and customer base.
Magellan Health Services Inc. provides behavioral health and radiology
benefit services to health plans, corporations and government agencies.
For the fiscal year ended December 31, 2005, the company generated
over $1.8 billion in revenues.
Refer to Moodys.com for the credit opinion that provides greater
detail and analysis
Corporate Finance Group
Moody's Investors Service
Paul D. Bienstock
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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