Fitch: Aetna's Ratings Remain on Rating Watch Negative Pending Coventry Acquisition's Close
by Business Wire
Fitch Ratings said today that the ratings of Aetna Inc. (AET) remain on Rating Watch Negative pending the close of AET's previously announced acquisition of Coventry Health Care, Inc. (CVH).
Todays' rating actions follows completion of Fitch's review of interim events leading to the acquisition's expected mid-2013 close. Fitch had placed AET's ratings on Rating Watch Negative on Aug. 20, 2012 following the company's announcement that it had entered into a definitive agreement to acquire CVH in exchange for AET common shares and cash totaling $5.7 billion.
Since then CVH shareholders have voted to formally adopt the agreement governing the acquisition, AET has issued $2 billion of senior unsecured securities to finance a portion of the acquisition, and AET has taken steps required to obtain necessary regulatory approvals.
KEY RATING DRIVERS
The Rating Watch Negative status continues to reflect Fitch's concerns about AET's post-close financial leverage and the integration risks associated with the transaction. Fitch views the transaction as materially larger and operationally more complex than acquisitions completed by AET in recent years, and notes that it is partially debt-financed.
Assuming the acquisition is completed as currently envisioned, upon its close Fitch expects to affirm AET's ratings and assign Negative Rating Outlooks. Important to AET's ultimately retaining its current ratings will be reducing financial leverage to more closely approximate pre-acquisition levels, and effectively integrating CVH's operations.
Subsequent to the acquisition's close and if Fitch determines that AET is likely to succeed in these efforts with only a minimal risk of not achieving its goals, the agency will revise the Rating Outlooks to Stable. Conversely, if it is determined that AET is unlikely to succeed in these efforts Fitch will downgrade AET's ratings one notch.
Key financial metrics included in Fitch's assessment will include AET's run-rate ratios of debt-to-EBITDA and debt-to-capital. At the acquisition's close, Fitch expects these ratios on a pro forma basis to approximate 2.0x and 40%, respectively. Fitch believes that run-rate ratios approximating 1.8x and 30%-35% achieved within 12-24 months of the transaction's close would be supportive of AET's current ratings.
Fitch's assessment of AET's effectiveness in integrating CVH's operations will focus on the company's success in achieving expense synergies AET has outlined to Fitch, as well as post-acquisition membership, revenue, and earnings trends.
Key rating triggers that could lead Fitch to remove AET's ratings from Rating Watch Negative and downgrade the ratings prior to the acquisition's close include:
--Material changes in the terms of the acquisition;
--Indications that AET's post-acquisition financial leverage is unlikely to be reduced to pre-acquisition levels.
Assuming the acquisition closes as expected key rating triggers that could lead Fitch to downgrade the ratings include run-rate:
--Debt-to-EBITDA ratios that exceed 1.8x;
--Debt-to-capital ratios that exceed 35%;
--EBITDA-to-revenue margins less than 7%;
--EBITDA-based interest coverage ratios less than 10x or maximum allowable dividend interest expense coverage below 5x;
--Organization-wide run-rate Fitch adjusted NAIC risk-based capital (RBC) ratios below 275%.
Assuming the acquisition closes as expected key rating triggers that could lead Fitch to affirm the ratings include run-rate:
--Debt-to-EBITDA ratios less than 1.8x;
--Debt-to-capital ratios less than 35%;
--EBITDA-to-revenue margins that exceed 7%;
--EBITDA-based interest coverage ratios that approximate 10x or maximum allowable dividend interest expense coverage approximating 5x;
--Organization-wide run-rate Fitch adjusted NAIC RBC ratios above 275%.
The following ratings remain on Rating Watch Negative:
--Long-term Issuer Default Rating (IDR) at 'A';
--Short-term IDR at 'F1';
--$2.0 billion commercial paper program at 'F1';
--$750 million of 6% senior unsecured notes due June 15, 2016 at 'A-';
--$250 million of 1.75% senior unsecured notes due June 15, 2016 at 'A-';
--$500 million of 1.5% senior unsecured notes due Nov. 15, 2017 at 'A-';
--$500 million of 6.5% senior unsecured notes due Sept. 15, 2018 at 'A-';
--$750 million of 3.95% senior unsecured notes due Jan. 9, 2020 at 'A-';
--$500 million of 4.125% senior unsecured notes due June 1, 2021 at 'A-';
--$1.0 billion of 2.75% senior unsecured notes due Nov. 15, 2022 at 'A-';
--$800 million of 6.625% senior unsecured notes due June 15, 2036 at 'A-';
--$700 million of 6.75% senior unsecured notes due Dec. 15, 2037 at 'A-';
--$500 million of 4.5% senior unsecured notes due May 15, 2042 at 'A-';
--$500 million of 4.125% senior unsecured notes due Nov. 15, 2042 at 'A-'.
The following 'AA-' Insurer Financial Strength Ratings remain on Rating Watch Negative:
Aetna Life Insurance Company
Aetna Health Inc. (a Pennsylvania Corporation)
Aetna Health Inc. (a Florida Corporation)
Aetna Health Inc. (a New Jersey Corporation)
Aetna Health Inc. (a Texas Corporation)
Aetna Health Inc. (a New York Corporation)
Aetna Health of California Inc.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013);
--'Health Insurance and Managed Care (U.S.) Sector Credit Factors Special Report' (Jan. 29, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
Health Insurance and Managed Care (U.S.) Sector Credit Factors