Team Health Seeks Dividend Recap

Cornerstone Equity Investors, Madison Dearborn Partners and Beecken Petty & Co. are looking for a $30 million one-time dividend from portfolio company Team Health. The management and staffing healthcare provider is funding the dividend through a $350 million refinancing facility led by Bank of America, J.P. Morgan and Merrill Lynch. The facility comprises a six-year, $100 million revolver and seven-year, $250 million "B" loan (see story, page 3).

The bank debt refinancing is being done in conjunction with a tender offer for Team Health's senior subordinated bonds. As part of the recap, Team Health will also issue $180 million of bonds and redeem outstanding preferred stock totaling approximately $158 million. Moody's Investors Service assigned a B1 rating to Team Health's bank credit facilities and a B3 to the company's bonds.

"The rating reflects increased leverage resulting from the redemption of the preferred stock and the payment of a common equity dividend," said Terence Moore, v.p., and a senior analyst at Moody's. From a debt repayment perspective, "The biggest challenges that Team Health is facing are those brought about by changes in the military health program TriCare and the company's ability to manage its professional liabilities," Moore said.

"The TriCare system will change who we contact and who we receive funding from," responded David Jones, Team Health's cfo. "Our contracting system is now fairly centralized and with the changes there will more direct contact with the local military facilities," he explained. "About 20% of our business is delivered through the TriCare system, and we understand that there may be some turbulence in the short term, but we are working with the management team to be very responsive to work in this new environment," Jones concluded. "Team Health's experienced management team should be able to navigate these unpredictable waters, in Moody's view," said Moore.

The state of the medical malpractice market could also affect Team Health. The company began to self-insure its medical malpractice costs in March 2003. Team Health records patient liability based on assumptions by management reflecting the frequency and severity of claims. If these estimates understate the actual claims experience, cash flow could be negatively impacted, Moore said. "Medical malpractice is affecting all healthcare providers," Jones said. "There is a benefit from operating in a captive environment, because the claims have longer payment cycles that allow free cash flow generation," he added.