Maxicare Says Its Creditors Agreed to Reorganization
Maxicare Health Plans Inc. said Thursday that its creditors agreed to financial terms of the company’s plan of reorganization, setting the stage for an unusually fast turnaround from the company’s Chapter 11 filing just six months ago.
Officials of the Los Angeles-based health maintenance organization said they intend to submit the plan in October for approval of the U. S. Bankruptcy Court in Santa Ana. The court could act in time for Maxicare to emerge from Chapter 11 before the critical period in January when major employers allow workers to choose their health insurance coverage for the year. The Chapter 11 filing antagonized some members, and continued uncertainty about the company’s future would put it at a decisive competitive disadvantage.
The company plans to begin a radio and television advertising campaign in October to bolster its image.
Few companies in such bankruptcy proceedings have been able to emerge from Chapter 11 in less than two years, according to analysts and other sources familiar with the process. The agreement of the creditor’s committee so soon is “an extraordinary achievement,” said Chris Street, managing director of Seidler Amdec Securities Reorganized Securities Group.
Under terms of the agreement, Maxicare will issue various amounts of cash, debt and equity securities to creditors and shareholders. A court-appointed creditors’ committee agreed to the plan just hours before the announcement, Maxicare said. But officials declined to disclose details of the plan, which becomes public upon the court filing.
Creditors, including bondholders, banks and health-care providers such as hospitals and physicians’ groups would get different percentages of debts owed them in cash, debt and equity. But Maxicare Chief Financial Officer Eugene L. Froelich and Chairman Peter J. Ratican would only say the formula could vary with the different plans included in the bankruptcy filing.
‘Recognized Value’
Maxicare and 47 of its subsidiaries filed for protection from creditors on March 16 after its banks, led by Bankers Trust Co. of New York, vetoed a new $15-million loan from an unidentified investor. The company had suffered huge losses during the past two years and had missed interest payments to banks and bondholders. It was also behind in payments to health-care providers under contract to provide medical services to Maxicare members.
Creditors agreed quickly to the reorganization because they “recognized value” in a reorganized Maxicare, Street said. “Since the bankruptcy, this business has stabilized very quickly. It appears to us that this company can earn $15 million to $20 million a year,” he said.
Quickly selling unprofitable plans improved the company’s financial position tremendously, he said. Primarily because it has sold, or closed, several plans Maxicare’s membership has declined to about 400,000 from a peak of 2 million in 1987. Meanwhile, Maxicare demonstrated that a core group of plans, including the California plan, could be successful, analysts said.
Maxicare’s current management has done a good job of restoring the confidence of health-care providers and employers in the months since the bankruptcy filing, said Dr. Rafael A. Amara, president of Hawthorne Community Medical Group, a provider group that is among Maxicare’s major creditors. Most providers were supportive of Maxicare, and their confidence grew with a less expansive-minded management team “paying more attention to the basics,” he said.
Credibility at Stake
The medical community was willing to cooperate with Maxicare, Amara said, because the credibility of for-profit managed care was at stake. Employers have also given Maxicare the benefit of the doubt in recent months because the premiums of health maintenance organizations have risen at a far lower rate than health insurance premiums in general, Street said.
Ratican said several employers had already renewed with Maxicare for 1990, including some of “America’s most sophisticated buyers of health-care benefits.” Agreement on the plan of reorganization was achieved after a “lot of hard work” and the creditors “diligently” working to balance interests in a manner fair to everyone, he added.
Leon Clements, chairman of the creditor’s committee and chief executive of the Browne-McHardy Clinic in New Orleans, said in a statement that the plan was “fair and equitable.” Banker’s Trust said the plan provides the best opportunity for the company’s lenders to achieve a successful reorganization.
“Our agreement will allow the public bondholders to recover substantial value without costly litigation,” Paul Aronzon, a Los Angeles attorney who negotiated for bondholders and creditors, said in a statement.
