April 5, 2012 / 3:37 PM / 5 years ago

TEXT-S&P raises Magellan Health Services to 'BBB-'

     -- Magellan Health Services Inc. has a growing revenue base,
diversifying business profile and consistent operating performance.	
     -- The company also has a very conservative capital structure for its 	
rating level.	
     -- We are raising the long-term counterparty credit rating on Magellan to 	
'BBB-' from 'BB+'.	
     -- The stable outlook reflects our expectation that the company will 	
maintain a stable earnings profile and a very conservative structure with 	
modest debt.	
Rating Action	
On April 5, 2012, Standard & Poor's Rating Services raised its long-term 	
counterparty credit rating on Magellan Health Services Inc. to 'BBB-' from 	
'BB+'. The outlook is stable.	
The upgrade reflects our recognition of Magellan's growing revenue base, 	
diversifying business profile, consistent operating performance, and a capital 	
structure that is very conservative for the rating level. In addition, the 	
company has strong liquidity and financial flexibility. Offsetting these 	
positive factors are Magellan's client concentration and an 	
acquisition-oriented growth strategy.	
We expect Magellan's revenue to grow significantly as evidenced by an expected 	
increase in revenue to $3.3 billion in 2012 from $2.8 billion in 2011 (about 	
17%). The company's business profile is also more diversified compared with 	
recent years. Segment profits (EBITDA plus stock compensation) from Magellan's 	
non-behavioral health-management lines of business (radiology benefits 	
management, specialty pharmaceutical management, and Medicaid administration) 	
constituted about 42% of total segment profits in 2011. We expect these to 	
constitute about 40% in 2012, compared with about 36% in 2010, 29% in 2009, 	
and 20% in 2008.	
Magellan also has a very conservative capital structure for the rating with no 	
debt as of year-end 2011. Although the company has a $230 million revolving 	
credit facility in December 2011--which matures in December 2014--even if the 	
company were to fully draw down the revolver, the resulting credit metrics 	
would be very conservative for the rating.	
In 2012, we expect Magellan's revenue to grow about 17% to $3.3 billion from 	
$2.8 billion in 2011. We expect 2012 segment profits to decline slightly to 	
$240 million-$260 million from $270.4 million in 2011, reflecting the absence 	
of about $20 million of favorable prior-period adjustments recorded in 2011 	
and $15 million of additional operating costs related to new product 	
development initiatives, and continued margin pressures.	
The outlook is stable. We expect the company to maintain a stable earnings 	
profile on an expanded revenue base and to maintain a very conservative 	
structure with a modest amount of debt. We would consider raising the rating 	
on Magellan only if we were to see a decline in client concentration, defined 	
as the top-10 customers constituting less than 50% of total revenues, coupled 	
with stable segments profits in excess of $300 million and a modest debt level.	
Conversely, we could lower the rating if contract terminations or margin 	
pressures result in EBITDA of less than $150 million. In addition, we could 	
lower the rating if a combination of debt issuance and declining operating 	
performance resulted in a debt-to-EBITDA ratio of more than 2.0x.	
Related Criteria And Research	
2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
Ratings List	
                                        To                 From	
Magellan Health Services Inc.	
 Counterparty Credit Rating             BBB-/Stable/--     BB+/Stable/--

Our Standards:The Thomson Reuters Trust Principles.
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