Magellan Health Services may have emerged from bankruptcy, but the company is still challenged to establish stable and consistent earnings, fully implement its operational improvement efforts and strengthen its balance sheet even further, notes Standard & Poor's. S&P has assigned a B+ to the behavioral health services provider's $230 million, five-year exit financing facility. The new facility and a $241 million, 93/8% senior unsecured note issue, also rated B+, backed the company's exit from bankruptcy last Monday.
The company must now focus on its internal structure, explained Joseph Marinucci, an S&P analyst. He added that the company's focus should include getting its people, processes and equipment in line. But the company's emergence from bankruptcy has given Magellan much sounder footing, he noted.
The proceeds from the term loan were used to repay in full the company's previous senior secured credit, which had approximately $161 million outstanding, in accordance with the company's plan of reorganization. The new credit is led by Deutsche Bank and includes the $100 million in term loans and a $50 million revolver. Credit Suisse First Boston serves as a syndication agent for the deal. The loans carry a spread of 21/2% over LIBOR. The facility also includes a $80 million letters of credit facility that bears a coupon of 31/2% on an annual basis. The letter of credit facility provides some security when Magellan is dealing with larger clients and will support its growth initiatives, Marinucci explained.
S&P notes that Magellan's leverage and interest coverage ratios are conservative for the ratings assigned. The company's debt-to-total capitalization rate is expected to be 45-50% for 2004. Its debt service multiple, represented by the company's adjusted EBITDA-to-interest and principal due, is anticipated to be two to three times. But the balance sheet is deemed weak because goodwill and intangibles account for more than 150% of shareholder value. But S&P could potentially revise its balance sheet assessment depending on the company's progress, according to S&P. Calls to Mark Demilio, Magellan's executive v.p. and cfo, were referred to a spokeswoman, who did not return calls by press time.