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REPRINT FROM september 21, 2010

JLL scores heaLthy gains from medicaL card system
by david carey
Puerto Rican health maintenance organization Medical Card System Inc. has completed a dividend recapitalization that increased the net total return earned by the buyout firm that controls it to about 130%. JLL Partners Inc., the New York firm that injected $66 million of equity in MCS in 2004 for just under a 60% ownership stake, reaped about $95 million from the latest dividend, said JLL managing director Ramsey Frank. Funding for the payout came from a $175 million, five-year term loan MDS raised last week. Jefferies & Co.’s Jefferies Finance unit and Deutsche Bank AG syndicated the debt, Ramsey said. Including a further $55 million or so that it has pulled from MCS in recent years, JLL has collected about $150 million in dividends, he said. MCS’ other stakeholders, which include Puerto Rico’s AdventMorro Equity Partners, have pocketed an additional $100 million or so of payouts. According to Ramsey, the new loan is the first debt that the fastgrowing company has assumed since JLL’s all-equity acquisition nearly six years ago. MCS emerged from the recap conservatively leveraged, with debt-to-Ebitda of just 1.6 times, he said. San Juan-based MCS has three main business lines: commercial health insurance, which it offers through major employers on the island; a Medicaid unit that serves more than 500,000; and a Medicare HMO. The Medicare operation, which MCS launched in early 2005, has supercharged growth, particularly in the area of private Medicare insurance products known as Medicare Advantage plans. Since 2004, yearly revenue has risen from less than $500 million to about $2 billion, while Ebitda has soared from about $20 million to $110 million. This year, Ramsey said, MCS is on track to earn $115 million to $120 million in Ebitda. “[MCS] put together an attractive product, and the business has been run well,” Ramsey said. The second-largest managed care company in Puerto Rico when JLL first invested, MCS now ranks No. 1, he said. “You haven’t seen many companies in managed care grow the way this one has the last five or six years,” he observed. Asked if the recent federal overhaul of healthcare coverage could hurt MCS, Ramsey said it wouldn’t. “There will be reduction in Medicare Advantage reimbursements, but you have the opportunity to change the benefits package — increase co-payments, reduce some benefits, modify some things. “So we think we will not be adversely impacted.” Eventually JLL will seek to exit its investment, possibly through a trade sale, he said. Jefferies banker Jeffrey Greenip led the financing for last week’s recap. The loan was issued at 97 and priced at LIBOR plus 1,000 basis points, with a 2% LIBOR floor. Steven Daniels and Robert Pincus of Skadden, Arps, Slate, Meagher & Flom LLP were counsel to MCS.

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