PacifiCare’s Plan to Raise $1 Billion in Debt Collapses

PacifiCare Health Systems Inc.’s plan to raise $1 billion in debt collapsed after Morgan Stanley Dean Witter & Co. failed to sell $600 million in bonds for the biggest U.S. operator of Medicare health plans, according to bankers familiar with the issue.

The Santa Ana managed-care company chose Morgan Stanley in April to arrange a $600-million junk bond and a $400-million loan. The package was aimed at refinancing $705 million in bank debt that matures in January, as well as $100 million in senior notes.

Bank of America Corp. also was tapped to help lead the transaction.

The plan collapsed because bond investors proved unwilling to finance a company that recently renegotiated contracts with doctors and hospitals, leading to higher costs. The loan from Morgan Stanley, which has lost about $12.5 million in arranging fees, was contingent on a successful bond sale.

PacifiCare spokeswoman Suzanne Shirley declined to confirm whether the Morgan Stanley deal had fallen through. “We are in active discussions with banks and investment firms on refinancing,” she said.

Morgan Stanley spokeswoman Margaret McCuaig declined comment.

PacifiCare’s stock, which has fallen nearly 75% in the last year, closed at $15.48, up 7 cents a share, in Nasdaq trading.

Morgan Stanley, which spent more than a month trying to sell the bonds, wasn’t helped by PacifiCare’s flip-flop on earnings guidance, analysts said. On July 17, the company’s shares fell almost 10%, after the company said second-quarter profit beat analysts’ estimates, less than two months after cutting projections for the year.

Morgan Stanley initially told PacifiCare it would be able to sell bonds at a yield of less than 10%, according to Pearl Chang, a fixed-income analyst with research firm CreditSights.com. In the end, the securities firm couldn’t drum up demand at a 12% yield, or 2 percentage points higher than it originally told the company, Chang said.

Morgan Stanley “may have painted a rosier picture than they should have when they pitched this deal,” Chang said.

Analyst John Szabo of CIBC World Markets said he expects the company to work out some sort of agreement with its banks. However, an extension could cost the company several million dollars in higher interest payments.

PacifiCare has asked Bank of America, the agent on its existing loan, and its other lenders to give the company nine months more to pay back its bank debt and raise new funds, according to the bankers.

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Times staff writer Marc Ballon contributed to this report.

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Ailing Stock

PacifiCare is having trouble refinancing its debt while it’s in the midst of a turnaround that’s taking longer than expected. Since May 1, the company’s stock has fallen 59%.

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PacifiCare, weekly closes and latest on Nasdaq

Wednesday: $15.48, up 7 cents

Source: Bloomberg News