Aetna, WellPoint eye funding acquisition deals

Aug 22 (IFR) - Investors will not be short of bond offerings from health-care insurers in the months ahead, as Aetna and WellPoint are expected to jump into the market with about US$6.7bn of unsecured debt and commercial paper.

With 30 million people expected to be added to the rolls of America's insured under President Obama's health-care reforms, the two companies have been looking to expand their Medicare- and Medicaid-related businesses.

They have gone on a US$12bn spending spree in the past few weeks, and new bond deals are expected to help fund those acquisitions.

This week Aetna announced the US$7.3bn purchase of Coventry Health Care, following WellPoint's announcement a month ago that it is buying Amerigroup for US$4.9bn.

About US$2.5bn of the financing for Aetna's deal will be raised in the unsecured bond and commercial paper markets, while WellPoint is looking to come to the bond and CP markets for about US$4.2bn.

BETTER BET

The spreads of both insurers have widened out on news of the acquisitions, due to the increase in leverage the two are taking on.

Aetna's 4.5% 2042s, trading around 149bp last Friday, gapped out to 170bp after the Coventry announcement.

Meanwhile WellPoint's 4.625% 2042s were trading around 185bp -- widening from a new issue spread of 157bp when it did the deal in May, just a day after Aetna priced its 4.5% 2042s at 160 bp.

Some in the market think Aetna is the better bet.

"Despite the prospect of debt issuance from both companieswe view the current differential between Aetna and WellPoint as appropriate, given Aetna's better diversified operating portfolio and Aetna management's consistent track record of delivering on strategic and financial targets better than WellPoint," Barclays analysts said this week.

But Scott Kimball, senior portfolio manager at Taplin, Canida & Habacht, part of the Bank of Montreal asset management stable, favors WellPoint.

"I would probably favor WellPoint slightly, depending on concession and where the spreads were at the time of issuance, of course," he told IFR.

"WellPoint is more likely to be the more conservative of the two, in terms of their capital structure," he said, adding: "I would be more interested in adding to positions in UnitedHealth or Humana if their spreads widened as a result of more new issuance from WellPoint and Aetna."

Aetna's acquisition will provide it with an estimated US$50bn in pro forma revenues for 2012, but its pro forma leverage on a debt-to-capital basis is expected to jump to at least 40% from around 30% -- much higher than the 30%-35% debt leverage range the rating agencies deem appropriate for a company rated Baa1/A-minus.

WellPoint, rated slightly lower by Moody's than Aetna at Baa2, but the same by Fitch and S&P, will see its pro forma revenues jump to around US$70bn for full-year 2012, while its debt-to-capital increases to 39%. Like Aetna, its management said it was committed to reducing leverage back to levels in line with its current Baa2/A-minus rating within two years.

A third company, Cigna, also said in an earnings call earlier this month that it was open to pursuing additional debt-funded acquisitions. Cigna acquired HealthSpring for US$3.8bn in January.

Cigna's bonds have outperformed those of its peers over the past six months, giving investors 364bp of excess returns compared with 124bp for the investment-grade health insurance sub-index of the Barclays corporate index.

No one seems to think that any of the three will be adversely affected by any dismantling of the so-called "Obamacare" reforms if the president is not re-elected.

"Obamacare has spurred these companies on to acquisitions, but these purchases are not necessarily bad news even if the current political environment changes," said Jody Lurie, credit strategist at Janney Capital Markets.

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