A Jan. 3 sell recommendation on Magellan Health Services issued by Elie Radinsky, a high-yield health care analyst at Jefferies & Co. and a 2001 Institutional Investor All-America Fixed-Income team runner-up, created a stir in the junk community. In response to his actions,Kathleen Lamb of Credit Suisse First Boston, an II second-teamer, sent a Bloomberg message criticizing Radinsky to her research colleagues and sales force. Meanwhile, Magellan, a psychiatric care provider and major junk issuer, has seen its bond prices fluctuate wildly.
In the Bloomberg message text, CSFB's Lamb writes that Radinsky "is very pissed off" that he did not get hired on a bond deal the company did last year, implying that Jefferies' failure to land the underwriting mandate was the reason for Radinsky's negative call. Magellan raised $250 million when J.P. Morgan Securities sold 9 3/8% senior notes in late May. Lamb acknowledged authorship of the message, but declined to comment on the content. (For a copy of the Bloomberg message, go to www.bondweek.com.).
Radinsky would not discuss Lamb's message. He says he became increasingly negative on Magellan after the company lowered earnings guidance in December. He says the most critical reason for the sell recommendation is that Magellan's costs are escalating as consumers demand more choice in selecting a provider, and psychiatric care loses its stigma and treatment becomes increasingly common, particularly in the wake of Sept.11.
Another veteran analyst sees nothing wrong with Radinsky's call, and says Radinsky is "one of the few smart guys that ever came out of a ratings agency," adding that Lamb, while a good analyst, may have become a victim of the star system. "She's almost looking to be controversial," he says.
Mark Demilio, Magellan cfo, confirms that Jefferies was a finalist for an underwriting slot last year and came up short, but says Radinsky is a "good analyst" and he "couldn't imagine that [Radinsky] would let that affect his professional judgement."
Magellan's 9% senior subordinated notes of '08 (B3/B-) had floundered since the company lowered earnings guidance in early December, plunging from 98 to the low 90's. The bonds eventually hit 88.5 on Jan. 3, when Radinsky issued his strongly negative report, reiterating a "sell" recommendation on the senior subordinated notes and setting a price target of 75. Though the Jan. 3 sell recommendation was a reiteration of a December sell recommendation, it had a greater effect on the bonds because it was a more focused report on Magellan and was more prominently featured than the December report. He also went from "hold" to "sell" on the 9.375% senior notes of '07 (B2/B+). As if the prospect of a dealer analyst putting out a "sell" rating was not shocking enough, his report caused the bonds to plunge another four to five points.
The day after Radinsky's report, Bill Reiland, the top II-ranked analyst and head of high-yield research at Morgan Stanley, upgraded the Magellan bonds from a "buy" to a "strong-buy". Reiland did not address Radinsky's downgrade in his report, but merely stated his case for Magellan, causing the bonds to firm. Last Friday morning, they were bid at 89.