Repost from WSJ 02/13/98: Oxford Health Could See Wider Loss
Good Morning, everyone! -Tom
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February 13, 1998
Oxford Health Could See Wider Loss;
KKR, Texas Pacific May Inject Capital
By STEVEN LIPIN and RON WINSLOW
Staff Reporters of THE WALL STREET JOURNAL
Oxford Health Plans Inc. is expected to post a wider fourth-quarter loss than its initial forecast, one of the reasons the company is seeking to raise fresh capital, people familiar with the situation say.
While a number of investor groups are talking with the managed-health-care company about potential investments, and no decision has been made, Kohlberg Kravis Roberts & Co. and Texas Pacific Group appear to be leading contenders to provide financing. A final decision is expected by next week.
KKR and Texas Pacific are jointly proposing to raise about $600 million in cash and debt to invest in Oxford, people familiar with their proposal say.
KKR, of New York, and Texas Pacific, of Fort Worth, Texas, and San Francisco, are proposing to invest about $300 million in cash for a stake of between 15% and 19.9% in Oxford. That implies existing shareholders, including Michael Price's Franklin Mutual Advisers Inc., will see their holdings diluted. The remaining $300 million would consist of loans or bonds.
A spokeswoman for Oxford, of Norwalk, Conn., declined to comment on the loss and the possible financing.
$100 Million Bridge Loan
Earlier in the week, Oxford disclosed that it obtained a $100 million bridge loan from Donaldson, Lufkin & Jenrette Securities Corp. Oxford is paying a steep interest rate on the loan of 2.5 percentage points above the prime rate, or 11%. The bridge loan was needed because its reserves were either below minimum requirements in certain states in which it operates, or perilously close to below the minimum level needed, people familiar with the matter say. These states are New Jersey and Connecticut, these people say. The company would only say the funds were used to make "capital contributions to certain of its HMO subsidiaries."
Like most managed-care and insurance companies, Oxford operates health plans in several states. Each plan must meet capital and other regulatory requirements in its respective state. The Oxford spokeswoman said the company didn't use proceeds from the bridge loan to contribute capital to its New York HMO, which is by far its biggest plan, accounting for about 65% of its annual premium revenue. But it has contributed significant reserves to New York, which helped deplete its capital base.
Meanwhile, the company continued to bleed red ink in the fourth quarter and first quarter, people familiar with the matter say. These people say the company is likely to post a loss wider than the $120 million, or $1.50 a share, that was forecast in early December.
Computer-System Debacle
Oxford is reeling from the effects of a computer-systems debacle that began in late 1996 and hobbled both its billing and claims processing operations, causing officials to lose track of both receivables and expenses at a time when medical costs began to escalate. As a result, it shocked Wall Street by reporting a $78.2 million loss for the third quarter and forecast the even-larger deficit for the fourth quarter. The losses reflected, among other things, its inability to collect about $111 million in premiums and the necessity to make additions to its reserves in several states totaling more than $250 million.
The problems toppled the company from the top ranks of the managed-care industry and sent it searching for new sources of capital as well as for a new chief executive and chief financial officer. Oxford is expected to reach an agreement on both financing and a new CEO by the time it releases its fourth-quarter results.
Other investors are also studying whether to make proposals to invest in Oxford. One group is an affiliate of J.P. Morgan & Co., say people familiar with the fund raising. Another is an insurance-investment partnership called Trident Fund, these people say. Trident is operated by a partnership that includes J.P. Morgan and Marsh McLennan Cos., as well as institutional investors. J.P. Morgan declined to comment. Trident executives didn't return calls.
Chase Manhattan Affiliate
Another group considering whether to make a proposal is an affiliate of Chase Manhattan Corp., the people said. A Chase spokesman declined to comment.
Meanwhile, the team of KKR and Texas Pacific has been working closely in recent days with DLJ, Oxford's financial adviser, to come to final terms. The group would bring with it Norman Payson, the former chief executive of HealthSource Inc., who would become CEO of Oxford. Clifton S. Robbins, a KKR partner, has a long-term relationship with Steven Wiggins, Oxford's founder and chairman.
All the parties declined to comment or didn't return calls.
Susan Cogswell, a spokeswoman for the Connecticut Insurance Department, said last week that as of the third quarter the Oxford HMO didn't meet minimum capital requirements in that state. Oxford contributed $7 million to satisfy regulatory concern. She said the state didn't expect to get an update regarding the fourth quarter until March 1.
In Pennsylvania, regulators concluded that Oxford's HMO was close to the minimum statutory reserve level at the end of the third quarter. As a result, the parent also infused additional cash in the company. The offices of the New Jersey state insurance department were closed Thursday for Lincoln's Birthday.
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
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