OREANDA-NEWS. Fitch Ratings has removed from Rating Watch Negative and affirmed the 'BBB' Insurer Financial Strength (IFS) ratings of certain Health Net Inc. (HNT) subsidiaries. The Rating Outlook is Negative. HNT's 'BB+' Issuer Default Rating (IDR) and 'BB' senior unsecured notes remain on Rating Watch Negative.

Today's rating action follows the completion of a periodic review of HNT's ratings. Fitch placed HNT on Rating Watch Negative on July 3, 2015 following the company's announcement that it had entered into a definitive agreement under which it would be acquired by Centene Corp. (CNC). Fitch expects the HNT-CNC merger will close in early 2016, and HNT's ratings will be primarily be shaped by CNC's post-acquisition consolidated credit quality. Fitch does not currently maintain public ratings on CNC.

Today's ratings affirmation reflects Fitch's view that HNT's IFS ratings will remain at the current level upon close of the merger with CNC. The Negative Outlook on HNT's IFS ratings reflects potential execution risks as CNC integrates HNT and continues on its current rapid growth rate.

The continued Negative Rating Watch on HNT's holding company ratings reflects CNC's expected post acquisition debt-to-EBITDA and debt-to-capital ratios that are outside of Fitch guidelines for typical notching between insurance operating company and holding company ratings. Upon the close of the merger, Fitch expects to downgrade HNT's IDR and senior notes by one notch.

'Scores' underlying HNT's ratings and the factor's forward trend are discussed below under Key Rating Drivers. Collectively, these scores support HNT's IFS ratings and its negative rating.


Market Position and Size/Scale scored 'bbb+', and Fitch believes this score will migrate upward to 'a-' once the acquisition closes. The combined HNT-CNC membership will be meaningfully more diverse from a geographic perspective than HNT's membership has been historically. Fitch believes that this is favorable from a ratings perspective because it reduces the company's exposure to economic, competitive, and regulatory conditions in any single market. CNC currently has members in 23 states while HNT has members in three and its Western Region operation is heavily concentrated in California from which it derives roughly 90% of its membership.

The combined HNT-CNC organization's membership will also be more diverse from a product perspective than HNT's has been on its own with significant portions derived from Medicaid, TRICARE and commercial products. Fitch estimates that the combined HNT-CNC organization will have over 10 million members.

Financial Performance and Earnings scored 'bbb-' and Fitch believes this score will migrate upward to 'bbb' once the acquisition closes. The combined HNT-CNC organization will have a meaningfully larger revenues and earnings profile than HNT's stand-alone profile. Based on annualized financial results through Sept. 30, 2015, the combined company's revenue would be approximately $38 billion and earnings would be $527 million. HNT and CNC have disclosed that they expect to realize approximately $150 million of synergy-related expense savings within two years after the acquisition's close. Expense savings of $150 million would add approximately 40 basis points to Fitch's estimate of the two companies' combined pro-forma nine month 2015 EBITDA-to-revenues margin of 3.3%.

Capitalization and Financial Leverage scored 'a-' and and Fitch believes this score will migrate downward to 'bbb-' once the acquisition closes. Fitch projects a combined HNT-CNC organization's debt-to-EBITDA of 3.3x using rolling four quarters EBITDA for both companies and management's estimate of $4.1 billion in debt following the merger. Debt-to-capital is expected to be roughly 46% at the acquisition's close. At Sept. 30, 2015 HNT's comparable ratios were 1.4x and 26% respectively. Fitch also believes that HNT's insurance company subsidiaries' NAIC risk-based capital (RBC) ratios may be managed to moderately lower levels consistent with CNC's insurance company subsidiaries.

Debt Service Capabilities and Financial Flexibility scored 'a' and the ratio EBITDA-to-interest expense has shown considerable improvement through the first nine months of 2015 increasing to 15.7x. Fitch believes that this score will decline to 'bbb+' once the acquisition closes as financial flexibility could be limited after the material increase in debt to fund the acquisition. Further, Fitch estimates a post-close interest coverage ratio below 6x assuming an annual interest expense of approximately $230 million.


Following the planned acquisition's close, HNT's ratings and Outlook will be most sensitive to CNC's mid-to-long-term financial leverage metrics, ability to generate consistent earnings in light of its rapid membership growth and efforts to integrate HNT, and ability to benefit from the combined CNC-HNT organization's larger and more diversified market position.

Fitch would likely affirm HNT's ratings if the merger failed to close.

The following ratings remain on Rating Watch Negative:

Health Net Inc.
--Long-term IDR 'BB+';
--6.375% senior notes due June 2017 'BB'.

The following ratings were affirmed with a negative rating outlook and removed from Rating Watch Negative:

Health Net Of California, Inc
Health Net of Arizona, Inc
Health Net Health Plan of Oregon, Inc
--IFS at 'BBB'.