Standard & Poor's Corp. on Friday downgraded some of the debt of Maxicare Health Plans Inc., saying the Los Angeles-based health maintenance organization's "prospects for a return to profitability are dubious."
In a strongly worded statement, the bond rating agency said it lowered its ratings to the "low speculative grade" of CCC from B- on $245 million of Maxicare's subordinated debt and $45 million of its Healthcare USA Inc. unit's subordinated debentures. Analysts were not surprised by the action, given Maxicare's deteriorating financial condition during the past 18 months.
Perhaps more significant is that Maxicare has retained a law firm known primarily for its bankruptcy work, said Steven B. Reid, an analyst with Wedbush Securities Inc. of Los Angeles. The hiring of Stutman, Treister & Glatt--a Los Angeles-based firm specializing in bankruptcy, insolvency, corporate reorganization and commercial litigation--"may not mean anything," Reid said. But "this certainly is a potential company for a Chapter 11 (bankruptcy) filing," he said.
Maxicare spokeswoman Tobi Nyberg refused to confirm or deny that the company has retained Stutman Treister. Nyberg also had no comment on the S&P statement, adding that Maxicare Chairman and Chief Executive Fred W. Wasserman "isn't available to the press."
Out of Compliance With Loans
S&P said it was reviewing Maxicare's debt ratings in March, after the company announced a much higher than expected $255-million loss for 1987 and said it was out of compliance with certain conditions of its bank loans. For the first quarter, the firm reported a net loss of $21.3 million.
At the end of March, the company renegotiated its lending agreements covering $175 million in debt from a group of six banks. The terms of the agreement required Maxicare to sell assets to reduce debt over the next three years.
"Recent arrangements to sell six managed care plans should help avoid a near-term cash crisis," S&P noted Friday. "But the agreement (with its banks) requires principal reductions of some $60 million a year for the next three years. The low speculative grade rating reflects continuing uncertainty regarding ongoing future cash flow to meet these maturities."
S&P added that "prospects for a return to profitability are dubious, as the plans' premiums are inadequate to cover medical costs that seem to defy control. Ability to improve the performance of remaining health-care plans will be difficult in light of competitive market conditions, and Maxicare will be especially challenged given its publicized problems. Orderly disposition of additional assets will be crucial to its success in meeting heavy debt payments."
Maxicare is the nation's largest for-profit health-maintenance organization, with more than 2.3 million members in 25 states. HMOs provide care by charging patients a prepaid fee--most of which is usually paid by employers. In most cases, Maxicare does not provide health care itself but contracts with doctors, hospitals and others to deliver services.
Difficulties Run Deep
The company has grown tremendously since it was founded 15 years ago, with revenue jumping to $1.84 billion last year from $118 million in 1982. The company began an aggressive expansion in the early 1980s that culminated in back-to-back purchases in 1986 of Orange-based HealthCare USA and HealthAmerica of Nashville, Tenn. Those two acquisitions loaded Maxicare with debt, sinking the company deep into red ink.
But Maxicare's problems clearly go beyond difficulties in digesting acquisitions, said Bernard F. McDonagh, vice president of the Piper, Jaffray & Hopwood brokerage firm in Minneapolis. "They've had enough time to get the ship in order," he said. "They can't say that it's the acquisitions. There are some deeper problems in terms of controlling cost," he said, explaining that Maxicare has implemented some hefty premium increases that have been eaten up by soaring medical costs. "The main thing they have to do is to get those medical costs under control."
Many HMOs are having difficulties getting a grip on medical costs in a climate of fierce competition, including price cutting by conventional health insurers to compete better with HMOs. Maxicare seems caught in a vise of high cost and demanding lenders.
The requirement that Maxicare reduce its bank debt by about $60 million a year "is a pretty onerous condition," McDonagh said. A Chapter 11 filing would be "a difficult situation for them," he added, but company executives may have concluded that they "have to look at the options in case they get squeezed to the point they can't pay their debts."