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Fitch puts Aetna on negative review over Humana news

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Credit rating agencies continued to sour on Aetna Inc.'s plan to acquire rival health insurer Humana Inc. on Tuesday, as Fitch Ratings Inc. placed Aetna on review with negative implications based on new details of the proposed $37 billion merger.

In a report released Tuesday, Fitch analysts said the New York-based agency would lower Aetna's credit rating by one notch from A- on senior unsecured notes if the Hartford, Connecticut-based insurer proceeds with its current strategy for financing the merger with Humana, which would result in the nation's second-largest health insurance company by revenue and membership.

Specifically, Fitch's report notes that Aetna is still carrying a substantial portion of the debt it incurred on its 2013 purchase of Coventry Health Care Inc. and now expects to add approximately $16.2 billion in new debt to complete its acquisition of Humana, according to the company's presentation to investors on Monday.

“At the close of the acquisition, Fitch expects Aetna's financial leverage to be approximately 46%, and debt to EBITDA to be in excess of 3.0x due to the debt being issued to fund the cash portion of the purchase price,” Fitch analysts wrote in their report, referring to the company's earnings before interest, taxes, depreciation and amortization. “Fitch does not anticipate that Aetna's financial leverage metrics will return to a level appropriate for its current rating category within a 12-to-24-month time horizon normally associated with a rating outlook.”

Fitch said its rating action on Tuesday was also partially due to concerns about operational and/or earnings disruptions resulting from the integration of two companies as large as Aetna and Humana. Aetna executives told analysts Monday that the company expects to incur roughly $1 billion in costs associated with integrating Humana's operations and personnel through the end of 2019, along with an estimated $500 million in transaction-related costs through 2016.

However, Aetna and Humana executives have also said they predict that the combination of their two companies will generate approximately $1.25 billion in cost savings by the end of 2018.


In particular, experts said Aetna's acquisition of Humana will likely accelerate merger negotiations between Indianapolis-based Anthem Inc. and Bloomfield, Connecticut-based Cigna Corp.

Other credit rating agencies took a similarly negative view of the merger's projected impact on the resulting combined company's finances, following the deal's announcement Friday.

“The combined entity would likely operate at a higher level of financial leverage and a lower level of fixed-charge coverage (at least for the near term) versus our current expectations for both companies,” analysts at Standard & Poor's Corp. said in a report issued shortly after the deal was announced. “The higher level of financial leverage may also lower our assessment of the combined entity's capital adequacy through a debt-funded double-leverage adjustment to the group's total adjusted capital.”