Credit rating giant Moody’s Investors Service has placed a downgrade rating review of Ba2 senior debt rating for WellCare Health Plans, Inc. (WCG - Free Report) and Baa2 insurance financial strength ("IFS") rating for its subsidiary WellCare of Florida, Inc.
The agency decided to review the ratings after the company announced its intention to acquire Meridian — consisting of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc. and pharmacy benefits manager, MeridianRx — for a transaction value of $2.5 billion.
This strategic move will enable WellCare expand its Medicaid portfolio to as many as 13 states with a leading market share across six of the lot.
Factors Driving Rating Action
The rating agency is concerned about the increase in leverage ratio due to usage of debt to fund the Meridian buyout. It estimates the company’s debt-to-equity ratio to deteriorate from 35% as of Mar 31, 2018 to 44% or above, depending on the amount of debt issues. The company is expected to issue debt worth $0.6 billion and $1 billion and draw on the revolver credit of up to $400 million.
WellCare’s debt-to-EBITDA is supposed to increase from 1.9x to 2.8x. A significant amount of goodwill is also expected to increase along with the decline of EBITDA coverage of interest income.
Additionally, standard integrations risks associated with this kind of large-scale acquisition is another concern.
However, Meridian’s consolidation will likely prove accretive and improve WellCare’s scale and geographic diversification.
Moody’s might review its current ratings downgrade when the deal draws to a close or prior to that if additional information allows the rating giant to reach a particular conclusion. Moreover, the agency wants to analyze Meridian’s financial performance in order to understand its financial plans.
WellCare gave an indication to bring adjusted debt-to-capital ratio below 40% within a year of the transaction’s completion date. This will be achieved by paying a revolving credit line used for financing the deal along with increasing retained earnings.
The ratings of the company have been a reflection of its decent demographic presence, consistent growth, solid capital levels and a low leverage, relative to peers. However, factors like lack of non-risk business, relatively small size and government business concentration are partial offsets.
Shares of this Zacks Rank #1 (Strong Buy) company have rallied 13.39% year to date, outperforming the industry’s rise of 7.8%.
Other Stocks to Consider
Investors interested in the Medical-HMO industry can also check out other stocks worth considering like Anthem, Inc. (ANTM - Free Report) , Humana Inc. (HUM - Free Report) and UnitedHealth Group Incorporated (UNH - Free Report) . You can see the complete list of today’s Zacks #1 Rank stocks here.
Anthem and its subsidiaries operate as a health benefits company in the United States. With a Zacks Rank # 2 (Buy), the company managed to pull off an average trailing four-quarter positive surprise of 7.22%.
Humana works as a health and well-being company in the United States. The stock carries a Zacks Rank of 2. In the past four quarters, the company came up with an average positive earnings surprise of 6.16%.
UnitedHealth operates as a diversified health care company in the United States. The stock is a Zacks #2 Ranked player and delivered an average four-quarter beat of 3.64%.
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