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Subsequent to the announcement of a definitive deal between WellPoint Inc. (WLP - Analyst Report) and Amerigroup Corporation (AGP), A.M. Best Co. has placed the financial strength ratings (FSR), issuer credit ratings (ICR) and debt ratings of WellPoint under review, with a negative outlook.
WellPoint will acquire Amerigroup in a$4.9 billion deal that is expected to be consummated in the first quarter of 2013, pending approvals.
Pursuant to the deal, WellPoint will also acquire senior debt worth $475 million of Amerigroup. Moreover, the company is expected to fund the purchase with cash, commercial papers and issuance of new debts.
The rating agency expressed its concerns regarding the company’s financial position, as by assuming Amerigroup’s debt, WellPoint’s financial leverage will increase to 40%. Moreover, its goodwill and intangibles to equity are expected to exceed 100%. The rating agency anticipates these figures to surpass that of its peers, rendering WellPoint’s position vulnerable and exposed to market risks.
A.M. Best also opines that the increase in the company’s total debt will bring about a margin compression not only in the books of the parent company but lead to a contraction in the returns of WellPoint’s subsidiaries. This might pressurize the capitalization levels of the company and hamper its dividend policy in the upcoming quarters. Also, they are apprehensive given the rising economic pressures and restrained state budgets for financing the managed Medicaid programs.
However, the rating agency is hopeful given the company’s cash position that has improved 8.5% over the year-ago quarter. The company will also benefit from increased customer-base and also broaden its product offerings.
Another rating agency, Moody’s Investor Services also reduced the senior debt rating of WellPoint to Baa2 from Baa1 with a stable outlook Reuters reported. The company has an interest coverage ratio of 11.45%, which is below the industry average of 23.42%. We believe that by increasing its debt obligations it will further increase the interest expense burden. Simultaneously, the ability to meet its commitments might be pressurized.
WellPoint currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, we maintain a long-term Neutral rating on its shares.
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