Credit rating giant Moody's Investors Service has affirmed the Ba2 senior debt rating for WellCare Health Plans, Inc. (WCG - Free Report) and the Baa2 insurance financial strength for its subsidiary WellCare of Florida.
To fully acquire Meridian, WellCare also has plans to borrow around $450-$500 million on its revolving line of credit along with issuing $1.1 billion of new equity with ability to upsize and use around $300 million in cash. With this buyout, WellCare would be able to expand its portfolio into 13 states along with its leading market share in six.
The credit rating agency confirmed that the review for downgrade, announced in May, reflects several factors. The transaction will have more impact on leverage than expected earlier. The agency expects the leverage measured by adjusted debt-to-capital to remain below 40% and adjusted debt-to-EBITDA, which was 1.9x at year-end 2017, will be below 2.5x by 2019 end.
Secondly, the agency expects that the company’s phenomenal performance in the first half of 2018 including $513 million in adjusted EBITDA, $253 million in net income, certain business wins and the Illinois Medicaid expansion, could help it lower its debt level.
The ratings affirmation also mirrors the impact of WellCare’s higher membership as well as better geographic diversity. Moody’s also notes that the pending transaction and the increasing leverage would up the company’s goodwill, impairing the quality of capital and reducing earnings coverage of interest expense transaction.
WellCare's Ba2 senior debt rating and WellCare of Florida, Inc.'s Baa2 IFS rating represent better and consistent growth for the company, partially offset by the parent entity’s concentration in the government business, widening geographic presence, strong capital levels and a low leverage as compared to the peers.
Factors Driving the Ratings
Moody’s can downgrade the ratings provided there is deterioration in the government sector, debt to EBITDA sustained is above 3.0 x and EBITDA-to-interest expense is less than 6x or risk-based capital or RBC (CAL) is less than 150%.
The agency can upgrade the ratings if the company’s adjusted debt to EBITDA is less than 1.5x, RBC is at the company action level maintained above 200% and EBITDA-to-interest expense is greater than 9x.
Shares of this Zacks Rank #2 (Buy) player have soared 63.9% in the past year, outperforming the industry’s growth of 34%.
Other Stocks to Consider
Investors interested in the Medical-HMO industry can also check out some other top-ranked stocks like UnitedHealth Group Incorporated (UNH - Free Report) , Anthem, Inc. (ANTM - Free Report) and Humana Inc. (HUM - Free Report) .
UnitedHealth Group Incorporated operates as a diversified health care company in the United States. It carries a Zacks Rank of 2 and came up with a positive four-quarter earnings surprise of 3.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Anthem operates as a health benefits company in the United States and is a Zacks #2 Ranked stock. It managed to pull off an average trailing four-quarter earnings surprise of 6.65%.
Humana works as a health and well-being company in the United States and has a Zacks Rank #3 (Hold). In the last four quarters, the company came up with an average beat of 3.9%.
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