Moody's rates Magellan loan B1, notes B3

Moody's Investors Service assigned a B1 rating to Magellan Health Services, Inc.'s new senior secured bank facility, consisting of a $100 million term loan, a $50 million revolver and an $80 million pre-funded letter of credit facility and a B3 rating to Magellan's new senior unsecured notes due 2008. The outlook is stable.

Moody's said the B1 senior implied rating reflects much lower debt levels as the company emerges from its Chapter 11 bankruptcy and the potential for higher cash flow generation due to new senior management's implementation of cost savings initiatives.

The ratings also reflect the successful renewal of the Aetna contract until the end of 2005 and the ability of the company to renew certain contracts at higher premium levels.

However, on the negative side, the ratings incorporate uncertainty associated with the possible termination of the Aetna contract at the end of 2005, the potential loss of additional business during this contract period and the ability to adequately price premiums to offset higher behavioral care cost trends, which are persisting in the upper end of the 6% to 8% range.

Moody's said the secured bank facility rating has not been notched above the senior implied rating since it is not clear that the enterprise value of the assets securing the bank lenders will be sufficient, under a stress scenario, to cover the bank loans.

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