Backdating Sparks Bond Battle

Were bondholders right to hand a default notice to UnitedHealth just because the company's review of option dating delayed its quarterly filing?

UnitedHealth Group’s bondholders introduced a new wrinkle into the ongoing backdating scandal on Monday, sending the company a notice claiming it was technically in default of its bond indenture because a backdating review delayed the company’s June quarterly filing.

In a regulatory filing, UnitedHealth Group said it was not in default and would “defend itself vigorously” against the “purported notice of default.”

According to its indenture, the company must deliver copies of its Securities and Exchange Commission filings to the trustee within 15 days. But failure to do that alone may not be enough to constitute a default.

In a report released Wednesday, bond analyst Kathleen Shanley of Gimme Credit says it is unclear whether the bondholders who sent the notice hold 25 percent of the principal of the bond issue — the minimum amount they must hold before they, rather than the trustee, can declare the company in default.

Normally a staunch defender of bondholder interests, Shanley reacted skeptically to the default notice. She pointed out that UnitedHealth’s bonds currently are trading below face value, “so investors who bought below par would make a ‘tidy return’ if the company were forced to redeem the issue.”

Moreover, says Shanley, the weaker price of UnitedHealth’s bonds is not related to concerns about the health insurer’s delayed 10-Q. Rather, she said, yield on the underlying benchmark Treasury securities is higher than it was earlier this year. UnitedHealth, one of at least 100 companies under investigation for options backdating, “is by no means what we would consider a distressed credit, and we see no reason for panic selling,” wrote Shanley.

Nonetheless, Gimme Credit stopped short of calling the default notice “frivolous,” noting that the backdating scandal is a “serious issue.” Other companies caught up in the ongoing scandal have produced serial restatements, Shanley observed. “We think the odds are remote that debt payments will be accelerated,” she wrote, but if the company were to fail to file its restatement on time, it might need to amend its indenture.

UnitedHealth was one of 48 companies that postponed their second-quarter filing because of problems with option grant timing. Other well-known companies include Apple Computer, Monster Worldwide, CA, and Juniper Networks. A record number of companies filed late, and 138 of them have market capitalizations of at least $75 million, according to shareholder advisory firm Glass, Lewis & Co.

The backlash from bondholders isn’t the only group looking skeptically at UnitedHealth amid the options-backdating scandal. In May, the Public Employees Retirement System of Ohio and the Teachers’ Retirement System of Ohio brought a suit against the insurer, charging that the company’s top executives have overstated its earnings for the past decade through improper option practices. At one time, the Chairman and CEO William McGuire’s stock options had a paper value exceeding $1.6 billion.

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