In an effort to fund a part of the acquisition of Amil Participacoes S.A of Brazil, UnitedHealth Group Inc. (UNH) has issued bonds worth $2.5 billion. These bonds have been issued in four tranches of $625 million each, but with varying coupon rates and maturities.
While the first tranch will carry a coupon rate of 0.85 % and will mature in 2015, the second, third and fourth are carrying coupon rate of 1.4%, 2.75% and 3.95% respectively, and will be maturing in 2017, 2023, and 2042, respectively. The interest on these notes will be paid twice a year, with an interval of six months.
The coupon rate of interest on UnitedHealth's newly issued senior notes have been fixed higher than the treasury yield of the same duration. The interest spread is also greater for notes with longer maturity.
The bonds are senior notes in nature and these are carrying investment grade ratings from the leading rating agencies. Moody's Corp. (MCO) rated the notes A3 while Standard & Poor's and Fitch have conferred "A" and "A-" ratings, respectively, on these notes.
The ratings signify that UnitedHealth is capable of meeting its financial commitments, but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
Recently, the abovementioned rating agencies also affirmed ratings on UnitedHealth's existing debt just after it announced to acquire 90% of Amil Participacoes S.A of Brazil. Moody's affirmed UnitedHealth's senior debt rating at "A3" but lowered the outlook to negative from stable, reflecting concerns about the rise in leverage ratio attributable to the acquisition.
Standard and Poor's maintained its existing rating and outlook. Also, Fitch Ratings affirmed an "A" rating to the company's long-term issuer debt rating and the 'A-' to its senior unsecured securities.It also kept its stable outlook unchanged.
Though the acquisition will raise the debt leverage ratio of UnitedHealth to 35% from the present 30%, we are confident that it will gradually come down over time as the company churns out more cash and pays off its debt.
UnitedHealth currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the shares. Its peers Aetna Inc. (AET), CIGNA Corp. (CI), WellPoint Inc. (WLP) all retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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