Credit Suisse First Boston and Morgan Stanley have been working to persuade investors to buy into WellCare Health Plans' new credit facility, trotting out Morgan's top healthcare analyst and jacking up pricing. Bill Reiland, Morgan Stanley's head healthcare analyst, was called upon in a conference call to ease people's fears about playing in the HMO sector. In addition, pricing was juiced up on the $160 million "B" loan by 50 basis points to LIBOR plus 3 3/4%. One buysider said it is not that unusual for analysts to get involved, especially on a tougher deal. He described this as "a private, private deal...It's a sector that's very difficult to understand."
Reiland was brought in to talk about the HMO sector in general because he's knowledgeable in the field, a Morgan Stanley spokesman said. "Given the fact that WellCare is a privately held company there is none of the usual issues you have with analysts being present," he added. "No projections were given." Bank debt is private so there is no climbing over the walls between a research analyst and the sales force.
WellCare is a Medicaid and Medicare provider in Florida, Connecticut and New York. Investors got burned three years ago when Medicare was cut significantly and some of the providers went bankrupt. One loan investor said he is concerned because most of the business is in Florida. A couple of years ago, the state took some very aggressive action on Medicaid and will be re-examining things in November, he added.
The company's concentration in one state, low capitalization, high leverage, and the fact that all its business is government related is a concern, said Stephen Zaharuk, senior v.p. and senior analyst with Moody's Investors Service. Other concerns include the fact that WellCare's management team is young and have a lot planned including this transaction. They are starting up operations in Louisiana, talking about a possible initial public offering down the road, and wanting to expand their operations in the current locations. "It just seemed a lot on their plate in a very short period of time," he added.
The B2/B deal went out to investors a little over two weeks ago at LIBOR plus 3 1/4%. "That was a little aggressive, even in this market--especially for an HMO," one buysider noted. "Previously with pricing where it was, we were definitely not interested. Now maybe we will be, but it still might not be aggressive enough for us as a B2." The $210 million credit backs WellCare's acquisition of Harmony Health Systems. The deal also includes a $50 million revolver that went out at LIBOR plus 3%. It could not be determined if the revolver flexed up as well. Paul Behrens, WellCare's cfo, and Reiland did not return calls.