Credit ratings agency Fitch ratings has affirmed its long-term issuer default rating (:IDR) and issue ratings on WellPoint Inc. (WLP). The rating agency provided IDR of “A-“and issue ratings of “BBB+”. It has also confirmed the insurer financial strength (:IFS) ratings of “AA-“ to the operating units of WellPoint. However, both IDR and IFS ratings carry a negative outlook.
The ratings came on the back of factors like WellPoint’s steady performance, its competitive position in the market and strong capitalization of its subsidiaries. Moreover, Fitch remained optimistic about WellPoint’s AGP acquisition as it would reap benefits from the company’s burgeoning dual-eligible beneficiaries under the private health plans and Medicaid beneficiaries in 12 states.
Nevertheless, debt issued to fund the purchase of Amerigroup Corporation (:AGP) in December 24, 2012, has increased the financial leverages of the company. The ratings agency is also concerned about the huge competition faced within the commercial health sector, adverse implications of health reforms and fluctuating medical costs.
Additionally, with the incorporation of AGP in its business the company might face a few challenges which may have a further adverse effect on the operating performance of the company. Moreover, instability in top management leaves uncertainty regarding the company’s financial leverage. All these factors are reflected by the negative outlook on the ratings.
Considering the fact that the subsidiaries of WellPoint are self sufficient for their funding requirements and maintain their capitalization metrics, Fitch’s ratings reflect the differences between the IFS rating provided to the subsidiaries and the IDR rating provided to the parent company.
Going ahead Fitch expects WellPoint’s financial leverage to decrease over a period of 1–2 years due to reduction in debt and improved earnings. Fitch estimates the proforma 2012 debt-to-EBITDA ratio, including AGP to be about 2.5x and debt-to-total capital to be approximately 37%. This includes the $1.5 billion in senior unsecured convertible debentures issued in October 2012.
The strong cash flow of WellPoint allows it to maintain a balance between the share buybacks and deleveraging actions and hence control its financial leverage. It also stated that the rating is susceptible to a downgrade if management fails to maintain this balance. Fitch declared that if there is a reduction in WellPoint’s debt-to-EBITDA ratio of 2.2x or below and the other uncertainties also reduce, the outlook could be revised to stable.
Earlier in September 2012, ratings agencies, A.M. Best Co., Standard & Poor’s Ratings Services (S&P) and Moody’s Investor Services of Moody's Corp. (MCO) had assigned debt ratings to the then issued senior unsecured notes of WellPoint. While Moody’s had assigned a “Baa2” rating to the notes with a stable outlook, S&P rated these with an “A-”. Additionally, A.M. Best had rated the notes “bbb+” and placed these under review with negative implications.
WellPoint currently carries a Zacks Rank #2 (Buy).
More From Zacks.com
- Security Upgrades & Downgrades
- Fitch ratings