NEW YORK: Moody's warned Monday it may cut CVS Health Corp's Baa1 credit by one notch on concerns over the debt load needed to finance its US$69bn acquisition of health insurer Aetna.
CVS is intending to fund the cash portion of the deal, the largest corporate acquisition of the year, with a combination of cash on hand and debt financing.
Barclays, Goldman Sachs and Bank of America Merrill Lynch are providing US$49bn of financing commitments to fund the cash portion of the purchase.
The transaction is not contingent upon receipt of financing, CVS said.
While the combined entity would be a "one-of-a-kind vertically integrated healthcare company with huge scale", it will significantly increase CVS's debt, Moody's said.
"The transaction will result in significant weakening of CVS's credit metrics as it will be financed with a large amount of debt and will come with high execution and integration risks," the ratings agency said in a report.
It said the review could take longer than 90 days given the size and complexity of the transaction and the regulatory approval process. The deal is expected to close in the second half of 2018.
After the transaction closes, CVS's debt-to-Ebitda ratio is expected to increase to around 4.6x, CFO David Denton said on a conference call Monday morning.
The company is aiming for a mid-3x leverage two years after the acquisition, and to a low 3x leverage level in the longer term, he said.
To achieve this, CVS will suspend its share repurchase program, maintain its current dividend per share and steer clear of any large scale M&A activities.
"We are very focused on debt pay-down," Denton said.
CVS also carries a BBB+ rating from S&P.
The CVS/Aetna combination aims to tackle soaring healthcare spending through lower-cost medical services in pharmacies, according to a Reuters report.
It comes after Aetna's US$37bn plan to acquire smaller US health insurer Humana was blocked in January over antitrust concerns.
When the transaction closes, Aetna shareholders will own around 22% of the combined company, while CVS Health shareholders will own 78%.
CVS bonds widened on Monday morning. The company's 2.875% 2026s were seen trading 6bp wider at a G-spread of 132bp.
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