PacifiCare Bid to Refinance $805-Million 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 issue and a $400-million loan. The package was aimed at refinancing $705 million in bank debt that matures in January and $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.

“The fact that it’s a turnaround situation makes it a tough deal” to get done in this market, said Prescott Crocker, who didn’t plan to buy PacifiCare’s bonds for the debt fund he helps manage at Evergreen Funds in Boston.

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 to comment.

PacifiCare’s stock, which has lost nearly 75% of its value over 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.

“The company has clearly had problems predicting their earnings,” said Pearl Chang, a fixed-income analyst with CreditSights.com, an independent research firm.

Morgan Stanley initially told PacifiCare it would be able to sell bonds at a yield of less than 10%, Chang said. In the end, the securities firm couldn’t drum up demand at a 12% yield, Chang said.

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

Analyst John Szabo said reports of the financing plan’s collapse didn’t surprise him. He downgraded his rating on the stock in June to “hold” from “buy” over concerns about PacifiCare’s ability to pay back its debt, he said.

Szabo 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.

Also, customers now negotiating contracts for next year might shy away from PacifiCare, the CIBC World Markets analyst said.

PacifiCare now 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 debt and raise new funds, the bankers said.

Should PacifiCare get an extension on the loan, the company would try to sell a smaller junk bond issue of about $300 million. The new bonds would have a clause permitting an extension on the bank loan to 2004, the bankers said. That would give the company more time to raise the remaining funds through a new bank loan.

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Times staff writer Marc Ballon contributed to this report.