Magellan Health proposes restructuring $1 billion debt through prepackaged Chapter 11

By Peter Heap

New York, Feb. 14 - Magellan Health Services, Inc. said it has proposed a restructuring of its $1 billion of debt through a prepackaged Chapter 11 filing.

Under the plan, the company's existing $625 million 9% senior subordinated notes due 2008 would be exchanged for all the equity in the company, the existing $250 million 9 3/8% senior notes due 2007 would be reinstated but with some cash interest payments converted to payment in kind and the credit facility would be reinstated with a modified amortization schedule. Magellan Health's contingent purchase price obligations to Aetna would be modified and the customer contract with Aetna that currently expires Dec. 31, 2003 would be extended.

Magellan Health said in a filing with the Securities and Exchange Commission Friday that it has distributed a draft term sheet for the restructuring to its bank lenders, the ad hoc committee of noteholders and their financial and legal advisors. Magellan Health itself has hired Gleacher Partners, LLC as financial advisor for the restructuring.

In any event, Magellan Health will not make the interest payment on its 9% subordinated notes scheduled for Feb. 17 since it has received a blocking notice from JPMorgan Chase Bank, the administrative agent for its credit facility.

The Columbia, Md. behavioral managed care company added that it does not have sufficient cash on hand or the ability to borrow on its credit facility to make the scheduled interest payment or to make contingent purchase price payments due in February.

In addition, Magellan Health is currently in default on its credit facility.

One cause of the default is an order of seizure obtained by the State of Tennessee's Department of Commerce and Insurance in January for Tennessee Behavioral Health, Inc., one of Magellan's subsidiaries. Although the order was subsequently dissolved and Tennessee Behavioral Health is operating under an agreed notice of administrative supervision the resulting default has not been waived.

In addition, following the expiry of a waiver on Jan. 15 Magellan Health is also on default on some covenants in the credit facility.

Finally Magellan Health has made investments in non-guarantor subsidiaries, creating a further default because such investments are prohibited while it is in default.

As of Dec. 31, 2002, Magellan Health had $45 million outstanding on its revolver and $115.8 million of term loans.

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