Maxicare Renegotiates Debt, to Sell Some Assets
Maxicare Health Plans said Wednesday that it has succeeded in renegotiating its $175-million bank debt and is restating its 1987 financial results to show a $255.9-million loss, compared to a $60.9-million loss previously reported for the year.
The restated loss gives Maxicare a negative net worth of $29.3 million. As part of the agreement, the banks are requiring Maxicare to sell some assets, which weren’t named.
Maxicare’s spokeswoman declined to elaborate on the company’s announcement.
The debt renegotiation was an important step in Maxicare’s road to revival because the Los Angeles health maintenance organization’s creditors could have forced the company into bankruptcy proceedings. Analysts, however, had doubted the banking group led by Bankers Trust would make such a drastic move but instead would require Maxicare to sell some of its money-losing health plans.
The renegotiation was brought about by the previously reported 1987 loss, which put the company in violation of some terms of its bank loans. In 1986, Maxicare recorded net income of $4.3 million, down 79% from the year before thanks to the purchase in 1986 of two ailing health plans, HealthAmerica and HealthCare USA.
Maxicare, the nation’s largest for-profit HMO company, said the restated 1987 loss of $255.9 million resulted primarily from a reserve of $185 million for good will recorded when it bought HealthAmerica and HealthCare USA. The new reserve was recorded as of Dec. 31. (Goodwill represents the amount paid for something over its value on the company’s books. Goodwill is usually accounted for as an asset and is written off over several years.)
The reserve, apparently taken at the request of the banks, in effect recognizes that the value of the acquisitions was overstated and to some extent protects the company from future losses if it sells those operations as a loss.
In addition, Maxicare said it added about 4%, or $10 million, to 1987 claims reserves.
Maxicare said its $175-million revolving loan is being converted into a longer term loan that matures April 1, 1991. Under the agreement, Maxicare must make principal payments of $12.5 million per quarter, starting June 30.
Maxicare will also be required to apply some of the proceeds from required asset sales during 1988 to prepayment of the loan.
Maxicare granted the banks warrants to buy 1 million shares of the company’s stock at 150% of the market price of the shares on the date of closing. The warrants can’t be exercised until Jan. 1, 1990, and can be cancelled by Maxicare without any compensation to the banks if the term loan is paid off by Dec. 31, 1989.
