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By Phyllis Hanlon
On March 11, Magellan Health Services voluntarily filed a Chapter
11 petition of the U.S. Bankruptcy Code in an effort to reduce its
$1 billion debt. According to Erin Somers, Magellan's vice president
of public relations and communications, a proposed restructuring
plan has been designed that will cut the debt by half a billion
dollars and expedite the creation of a stronger capital structure.
The three-pronged debt-restructuring strategy allows for operations
to continue while basic fiscal concerns are addressed. Somers says,
"Our plan is to exchange a portion of our debt, the portion that
is held by some of our bondholders, for substantially all of the
equity in the company."
This "debt-for-equity swap" will cancel the company's existing
common and preferred stock, she says. Bondholders will then receive
97.5 percent equity in the company, preferred shareholders will
receive two percent and common shareholders will receive .5 percent.
Another key piece of this structural reorganization is a renewed
agreement with Aetna. Magellan will continue to act as manager of
Aetna's behavioral health care division for two more years through
Dec. 31, 2005, with an option to renew the contract for an additional
year.
Somers notes that Magellan shares a dual relationship with Aetna.
In addition to being a customer, Aetna is also considered a creditor.
"We have a financial obligation to them that dates back to our acquisition
of Human Affairs International, which has been owned by Aetna,"
says Somers. "So we will be issuing a note to Aetna as part of this
restructuring."
A significant monetary investment is also giving Magellan a financial
shot in the arm. Somers says, " We have a group of sophisticated
investors who are willing and ready to make a $50 million equity
investment in the company because they see us as having long-term
potential in our industry. We think that is a vote of confidence."
Throughout the debt restructuring process, Magellan anticipates
conducting business as usual. Somers emphasizes that the company
has been clear in stating its intention to maintain long-term partnerships
with customers, members and providers. "The day we filed [Chapter
11], we asked the court to rule on a motion that would allow us
to pay providers, customers and employees in the normal course of
business, whether for pre-filing claims or post-filing claims,"
she says. The court ruled in Magellan's favor. "That was a critical
action," Somers says. "We don't anticipate any disruption at all
in our business."
When asked about Magellan's relationship with Blue Cross/Blue Shield
of Massachusetts, Somers responded that there would be no negative
effects as a result of the bankruptcy filing.
Magellan's provider Web site (www.magellanprovider.com)
contains a special section that addresses the Chapter 11 filing,
including detailed information regarding the restructuring process
and frequently asked questions. "The realization that we've taken
a significant step to address our debt issue is going to position
us very well for success in the future," says Somers. Magellan expects
to emerge from its current restructuring process by this fall.
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