Fitch Expects to Rate Aetna's Senior Notes 'A-(EXP)' on Rating Watch Negative

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings expects to assign an 'A-' rating on Rating Watch Negative to Aetna Inc.'s AET issuance of approximately $13 billion of new senior unsecured notes. A full list of rating actions follows at the end of this release. Aetna's ratings were originally placed on Rating Watch on July 7, 2015, following the company's announcement that it had reached an agreement to acquire Humana Inc. (Humana) in a cash and stock transaction valued at approximately $37 billion.

Assuming the acquisition and its financing are completed as currently envisioned, upon close of the acquisition, Fitch expects to downgrade Aetna's ratings, including the expected rating being assigned today, by one notch.

The expected ratings assigned to the pending debt issuance are equivalent to the ratings assigned to Aetna's existing senior unsecured notes, and reflect standard notching based on Fitch's rating criteria. Fitch expects proceeds from the debt issuance to be used in conjunction with a term loan of approximately $3.2 billion to fund the cash portion of the purchase price of the company's pending acquisition of Humana, which is expected to be completed in second half 2016 subject to state and federal regulatory approval.

KEY RATING DRIVERS

The Rating Watch Negative status of Aetna's ratings reflects expected significant deterioration in the company's financial leverage metrics following the close of its pending acquisition of Humana, as well as potential operational and/or earnings disruptions that could arise as these two very large and complex organizations are integrated. In the event that the merger is not completed, the majority of the notes being issued contain a mandatory redemption clause that requires Aetna's redemption of the notes containing the clause at 101% of the aggregate principal amount plus accrued and unpaid interest.

The portion of the notes that does not contain the mandatory redemption clause is expected to remain in Aetna's capital structure for general corporate purposes, including payment of a possible merger termination fee. Fitch does not believe that, should the merger agreement be terminated, the amount of debt remaining in Aetna's post-redemption capital structure will be sufficient to warrant a downgrade of the company's ratings. As a result, under management's current plans, a termination of the merger agreement would likely result in Fitch's affirmation of Aetna's ratings.

At close of the acquisition, Fitch expects Aetna's financial leverage to be approximately 46%, and debt to EBITDA to be in excess of 3.0x due to the debt being issued to fund the cash portion of the purchase price. Fitch does not anticipate that Aetna's financial leverage metrics will return to a level considered appropriate for its current rating category within a 12 to 24 month time horizon normally associated with a Rating Outlook. Given Aetna's size and business profile, these metrics at its current rating would be a run-rate debt to EBITDA ratio approximating 1.8x and financial leverage of 30%-35%.

The ratings of Humana have also historically reflected Fitch's view that Medicare Advantage (MA) enrollment generally supports lower ratings relative to employer group and individual enrollment due to the U.S. government's large role in the MA market and the suppressive effect this role has in terms of margins and capital formation. As a large portion of Humana's revenue is associated with MA business, Aetna's exposure to this business will increase significantly at close of the transaction.

Aetna's ratings reflect the organization's major market position and significant size and scale, strong historical profitability and interest coverage, and generally solid balance sheet characteristics. Operating results in 2015 and first quarter 2016 have been in line with Fitch's expectations for the company's existing ratings. Fitch views the combination of Aetna and Humana as strategically beneficial to both organizations in terms of the application of Aetna's strong performance in commercial risk business to Humana's commercial business, geographic and business diversification, particularly with regard to Humana, as well as stronger provider networks and pharmacy claims costs benefit management capabilities.

Fitch's ratings on Aetna also continue to reflect the risks derived from government involvement in health insurance and managed care companies' ongoing business activities. Fitch's long-held concern is that government efforts to advance public policy goals could further adversely affect health insurance and managed care companies' ability to manage their business and hinder their ability to generate cash flow supporting debt obligations.

RATING SENSITIVITIES

At the close of the acquisition, Fitch expects to downgrade the ratings of Aetna by one notch and remove them from Rating Watch Negative, at which time Fitch will establish new rating triggers associated with the combined company's new ratings. If the transaction is cancelled, assuming no material deterioration in the company's credit metrics, Fitch expects to affirm Aetna's ratings and remove them from Rating Watch Negative.

FULL LIST OF RATING ACTIONS

Fitch expects to assign the following ratings on Rating Watch Negative:

Aetna Inc.

--Senior unsecured notes 'A-(EXP)'.

The following ratings remain on Rating Watch Negative:

Aetna Inc.

--Long-Term Issuer Default Rating (IDR) 'A';

--Short-Term IDR 'F1';

--Commercial paper 'F1';

--$250 million of 1.75% senior unsecured notes due May 15, 2017 'A-';

--$500 million of 1.5% senior unsecured notes due Nov. 15, 2017 'A-';

--$383 million of 5.95% senior unsecured notes due March 15, 2017 'A-';

--$375 million of 2.2% senior unsecured notes due March 15, 2019 'A-';

--$750 million of 3.95% senior unsecured notes due Sept. 1, 2020 'A-';

--$500 million of 4.125% senior unsecured notes due June 1, 2021 'A-';

--$600 million of 5.450% senior unsecured notes due June 15, 2021 'A-';

--$1 billion of 2.75% senior unsecured notes due Nov. 15, 2022 'A-';

--$750 million of 3.50% senior unsecured notes due Nov. 15, 2024 'A-';

--$771 million of 6.625% senior unsecured notes due June 15, 2036 'A-';

--$534 million of 6.75% senior unsecured notes due Dec. 15, 2037 'A-';

--$500 million of 4.5% senior unsecured notes due May 15, 2042 'A-';

--$500 million of 4.125% senior unsecured notes due Nov. 15, 2042 'A-';

--$375 million of 4.75% senior unsecured notes due March 15, 2044 'A-'.

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.

--Insurer Financial Strength (IFS) 'AA-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005490

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005490

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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