Standard & Poor's Places PHSY Systems 'BB-' Ratings on WatchNeg ( this one a short if it goes much higher)
NEW YORK, Aug. 3 /PRNewswire/ -- Standard & Poor's today placed on
CreditWatch with negative implications its double-'B'-minus issuer credit,
senior secured debt, and senior unsecured debt ratings on PacifiCare Health
Systems Inc. (PacifiCare). At the same time, Standard & Poor's withdrew its
preliminary bank loan and debt ratings, which it assigned on June 27, 2001, to
PacifiCare's proposed senior secured $150 million bank line, $350 million
senior secured term loan, and $500 million senior unsecured notes due 2011.
The ratings placed on CreditWatch affect about $705 million outstanding on
the bank loan and $100 million of senior debt.
Standard & Poor's took this rating action following PacifiCare's
announcement that it was terminating this debt financing as well as its tender
offer for $100 million of outstanding notes. The financing was intended to
replace PacifiCare's bank loan, which expired in January 2001. Standard &
Poor's expects PacifiCare to come up with an alternative method of repaying or
extending its existing credit facility, perhaps at terms less favorable than
under its initial debt-refinancing plan. However, this does place additional
liquidity pressure on the company.
Major Rating Factors:
-- Although PacifiCare is profitable, its earnings in 2000 and 2001 have
been negatively affected by the transition in some of its contracts
with providers. This has occurred primarily in its commercial health
plan operations and largely stemmed from a change from capitated to
shared-risk contracts with California hospitals in its networks.
-- On May 30, 2001, PacifiCare announced lower revised earnings
projections for 2001. The revised expectations of EBITDA of
$350 million and net income of $56 million-$59 million for the year
ended Dec. 31, 2001, are not inconsistent with Standard & Poor's
expectations in November 2000, when Standard & Poor's lowered its
issuer credit rating on PacifiCare to double-'B'-minus from double-
'B'-plus. Full-year 2000 EBITDA was $498 million.
-- Although earnings issues have also reduced the flexibility of
PacifiCare's operating companies to produce cash for the consolidated
organization, Standard & Poor's believes each regulated unit will
meet regulatory requirements for statutory capital over the next few
years. However, Standard & Poor's considers PacifiCare's consolidated
statutory capitalization (regulated entities only), based on Standard
& Poor's proprietary capital adequacy model, to be marginal.
-- Pretax interest coverage will be about 2.5 times in 2001.
PacifiCare's debt-to-total-capital ratio as of June 30, 2001, was
28.4%. Although this ratio is good, it could be subject to
variability because PacifiCare carries about $2.2 billion of goodwill
and other intangibles on its balance sheet, which is an aggressive
80% of capital. The goodwill is being amortized over periods ranging
from three to 40 years and primarily reflects the operations in the
Western region, including California. About half of this goodwill,
held at regulated entities, is generally not recognized as an asset
under statutory accounting principals. Any future goodwill writedowns
related to unprofitable markets could affect the company's debt
leverage.
-- Short-term liquidity remains good, with free cash flow projected to
be about $150 million in 2001. This projection assumes that the
existing bank facility is successfully renegotiated and that medical
claim trends do not continue to exceed premium yields projected by
the company.
-- PacifiCare holds a strong business position as a regional managed
care organization. With 3.7 million members as of June 30, 2001,
PacifiCare operates HMOs in eight states, with key market shares in
California, Colorado, Oklahoma, Arizona, and Texas. PacifiCare covers
more than 1 million members in its Medicare+Choice programs. The
company has historically had a strong position in the Medicare Risk
marketplace, but this product design has relied on capitated
contracts. Historically, it also focused on strict HMO products and
is now building preferred provider organization capacity to broaden
its product range and respond to market needs.
Standard & Poor's expects PacifiCare's 2001 EBITDA to be close to its
announced expectations, but there is potential for significant variation. The
company is expected to continue to meet regulatory capital requirements in all
states. Enrollment is expected to decline somewhat because of the company's
efforts to repair its earnings and because of exits from certain Medicare
markets. Standard & Poor's believes the company is in a transition period,
during which it is putting various systems into effect to manage health care
utilization and costs, tasks that were previously assumed under the capitated
contracts by providers.
Standard & Poor's will review the ratings once the company has completed
its alternative refinancing plans. -- CreditWire
SOURCE Standard & Poor's
-0- 08/03/2001
/CONTACT: Jack Reichman of Standard & Poor's, +1-212-438-7235/
/Web site: standardandpoors.com
CO: Standard and Poor's; PacifiCare Health Systems Inc.
ST: New York
IN: PUB INS |
