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Rating Action on WellPoint

Zacks Equity Research

Fitch Ratings assigned its long-term Issuer Default Rating (:IDR) of ‘A’ on WellPoint Inc. (WLP) and Insurer Financial Strength (:IFS) of ‘AA-’ on its subsidiaries. The outlook was also stable.

Concurrently, the rating agency also rated the planned issuance of senior unsecured notes worth $1.75 billion at ‘A-’. The outlook is maintained at stable.

WellPoint issued a debt of $1.75 billion. The debt was issued in two parts- 3.125% $850 million notes and 4.625% $900 million notes. The rating agency believes that the proceeds from the debt issuance, in part, would be used to pay off 6.8% $800 million senior unsecured notes expected to mature on August 1, 2012. The proceeds will also be deployed to lower commercial paper outstanding balance as well as for general corporate purposes.  

The ratings came on the back of WellPoint’s continued outstanding performance, solid competitive position and subsidiaries’ strong statutory capitalization.  

The ratings reflect higher debt-to-EBITDA ratio compared with the sector average, competition in the health sector, the probable risks that may arise during the implementation process of the health reform legislation and the inconsistent medical costs.

The rating agency noted that WellPoint’s financial leverage as of March 31, 2012 was 1.9x, which is ahead of their expectations and also more than its peers. Fitch believes that given the expected usage of the proceeds and operational performance of WellPoint, the financial leverage would not change much.

Nevertheless, weaker operational performance, which in turn has the potential to increase the financial leverage, could likely lead to rating downgrade.

The ratings are subject to upgrades if the financial leverage is less than 20% and the interest coverage ratio beyond 12x, debt/EBITDA lower than 1.0x, run-rate EBIT margins and consolidated risk based capital (RBC) beyond 10% and 320%, respectively.

On the contrary, the ratings will be downgraded if financial leverage is more than 35%, EBITDA/interest ratio falls below 7x, debt/EBITDA ratio is more than 1.9x, run-rate EBIT margins and consolidated RBC within 6.8% and 220%, respectively.
In a separate development, Standard & Poor's Ratings Services (S&P) also assigned ‘A-’ to the senior unsecured debt rating of WellPoint’s proposed debt issuance.

The rating was based on WellPoint’s competitive position, steady earnings growth and sound cash flow, offering ample financial flexibility. However, its share-repurchase program and an unimpressive net equity scenario coupled with increasing risk in the health care industry were negative factors.

The issuance is primarily to pay off a debt maturing in 2012. S&P believes lowering debt levels will augment the company’s liquidity and financial flexibility. The present liquidity position includes a cash and investment of $1.8 billion.

The rating agency expects the company’s debt-to-capital ratio to be in the range of 30%-35% by the end of this fiscal with the interest coverage around 10x. The rating agency also expects WellPoint’s dividend capacity to exceed $2 billion, which will aid the debt-servicing capacity of the company.

Following another media release, Moody’s Investor Service also rated WellPoint’s senior notes at Baa1.

The rating agency also provided (P)A3 rating to the senior debts of Allstate Corporation (ALL), a prime competitor of WellPoint. The outlook is negative. Aflac Inc. (AFL), another peer of WellPoint, is also assigned a (P)A3 rating on its senior notes with a stable outlook.

We retain our long-term Neutral recommendation on WellPoint. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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