Moody’s might cut Centene

Moody's Investors Service said it placed Centene Corp.’s Ba2 senior unsecured debt rating and the Baa2 insurance financial strength ratings of its operating subsidiaries on review for downgrade following the company's announcement that it entered into a definitive agreement to acquire Health Net, Inc. (senior debt rating at Ba2) for $6.8 billion.

The purchase price includes the assumption of $500 million of Health Net's outstanding debt and other related transaction fees.

The transaction, which is subject to regulatory approval and other closing conditions, is expected to close by early 2016.

Moody's said the review for downgrade reflects the challenges involved with the integration of the two companies as well as the adverse impact of the financing terms.

Although Centene plans to use $3.9 billion of equity (almost 60% of the total transaction) to fund the deal, the company will increase debt by roughly $2.7 billion including debt assumed from Health Net. As a result, at the close of the transaction pro forma adjusted debt-to-capital (where debt includes unfunded pension liabilities and operating leases) is expected to rise to about 44% from 39.7% as of March 31.

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