Fitch Expects to Assign 'A-' to Aetna's Planned Issue, Places Securities on Rating Watch Negative
Fitch Ratings said today that it expects to assign 'A-' ratings to Aetna Inc.'s (AET) planned issue of approximately $2 billion of senior unsecured notes and to concurrently place the notes on Rating Watch Negative.
The 'A-' ratings and Rating Watch Negative status are equivalent to Fitch's ratings and Rating Watch status on AET's currently outstanding senior unsecured notes.
Fitch's expectation is that the notes will be issued with a mix of maturities and that proceeds will be used to fund a portion of AET's previously announced acquisition of Coventry Health Care, Inc. (CVH). AET plans to acquire CVH in exchange for a combination of cash and AET common shares valued at approximately $5.7 billion.
The 'A-' ratings on the senior unsecured notes reflect AET's strong financial profile and leading competitive position in the health insurance and managed care market.
The Negative Rating Watch reflects concerns about AET's post-acquisition financial leverage and the integration risk arising from an acquisition that Fitch views as materially larger and more complex than those completed by AET in recent years. Fitch estimates AET's Sept. 30, 2012 ratios of debt-to-EBITDA and debt-to-capital, including the $2 billion issue on a pro forma basis, at 1.8x and 38% respectively.
These concerns led to Fitch's Aug. 20, 2012 decision to place AET's ratings on Rating Watch Negative following the acquisition's announcement. Assuming the acquisition and its financing are completed as envisioned, Fitch expects to affirm AET's ratings and assign Negative Rating Outlooks upon the acquisition's anticipated mid-2013 close.
Important to AET ultimately retaining its current ratings will be reducing financial leverage to more closely approximate pre-acquisition levels, and effectively integrating CVH's operations. Fitch currently believes this is the most likely outcome, but that execution carries risks given both the market environment and general challenges related to acquisitions.
If upon further analysis 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 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;
--Materially higher than expected acquisition financing costs;
--Indications that AET's post-acquisition financial leverage is unlikely to be reduced to pre-acquisition levels.
Key rating triggers that could lead Fitch to remove the ratings from Rating Watch Negative and affirm the ratings at their current levels include:
--Evidence that the acquisition is not going to be completed and that AET's financial profile is materially unchanged from its pre-acquisition profile;
--Operating performance that suggests AET's post-close financial leverage is likely 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 approximating 275%.
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' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
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