Fitch downgrades Cigna on $24bn debt raise for Express Scripts acquisition

Fitch Ratings has downgraded the Insurer Financial Strength (IFS) ratings of US health insurer Cigna Corporation’s operating subsidiaries to 'A' (Strong) from 'A+'.

In March 2018 Cigna entered into a definitive agreement to acquire pharmacy benefit manager Express Scripts for a cash and stock transaction of approximately $67 billion, including about $15 billion in Express Scripts' debt.

Fitch's rating action coincides with Cigna's financing of up to $24 billion in new debt related to the pending purchase of Express Scripts in a cash and stock transaction that is anticipated to close as early as fourth-quarter 2018. Upon close of the transaction, it is expected that all debt will be cross-guaranteed. Approximately $3 billion in debt is not mandatorily redeemable should this transaction fail to be completed.

While Fitch believes that the potential strategic benefits associated with the combination of these companies are significant, today's rating action reflects Fitch's concerns regarding the sharp rise in financial leverage.

Additional concerns include potential operational disruptions related to integration, uncertainty around achievement of profitability targets and material addition of goodwill.

At the close of the transaction, Fitch expects Cigna's financial leverage and debt-to-EBITDA ratios to be approximately 49 percent and 3.2x, respectively. These metrics are well in excess of current rating sensitivities of 35 percent and 1.8x, respectively, and are consistent with Fitch's ratio guidelines at the below-investment-grade level with respect to holding company senior debt.

Although management plans to reduce financial leverage following the close of the transaction, Fitch does not anticipate that financial leverage will return to a level consistent with guidelines for Cigna's previous ratings within the 12 to 24 months’ time horizon typically associated with Fitch's ratings.

Fitch notes that a material amount of the cash flows to service the debt will come from Express Scripts and therefore is utilizing both insurance and corporate criteria to derive holding company ratings.

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