The five-year, $150 million "B" loan for PacifiCare Health Systems was oversubscribed last week after J.P. Morgan and Morgan Stanley pitched the $300 million refinancing deal to investors with spreads of LIBOR plus 31/2% on the institutional piece and LIBOR plus 31/4% on the three-year, $150 million revolver. The rates are cheaper than those that the commercial health plan and Medicare HMO provider received for its deal in 2001. That credit was priced in the LIBOR plus 5% range after leads Morgan Stanley and Bank of America had to juice up the interest rate because of investors' concerns over management's ability to reduce cost issues.
"The company was in trouble," an investor said, adding that the problems from two years ago have since improved. Moody's Investors Service also noted that the Cypress, Calif.-based company has improved performance at its regulated subsidiaries, "resulting in better capital adequacy and dividend capability." B1-rated PacifiCare faces risks associated with its dependence on the Medicare risk business. But this dependence is declining, according to Moody's. PacifiCare has furthermore shown a profit since exiting the Medicare risk program in Houston.
"If the [patient's] costs go up beyond what the government premiums pay us, we are taking on the risk," said Suzanne Shirley, v.p. of investor relations at PacifiCare, explaining how the risk program works. She declined to discuss any details of the pending credit. Calls to J.P. Morgan and Morgan Stanley bankers were not returned.