CVS Health Corp. bought health insurer Aetna Inc. for nearly $70 billion. Cigna Corp. paid about $54 billion for pharmacy-benefits manager Express Scripts Holding Co.
These deals and others have been powerful consolidating forces in the U.S. health industry, with high price tags accompanied by investment-grade bond issuances.
Now they prompt a new question: Is financial risk also getting concentrated?
Maybe, according to a new note out from Fitch Ratings.
Just ten companies, including CVS
account for 51% of the investment-grade health care bonds outstanding, according to the credit rating agency. Investment-grade refers to low to moderate credit risk, and includes Fitch ratings between “AAA” and “BBB.”
“The outlook for the sector remains intact due to solid underlying demand growth for most types of healthcare products and services but downward rating migration is occurring as the sector is consolidating and companies are funding large strategic acquisitions,” the Fitch report said.
Related: These 7 states are most at risk from rising health-care costs
To some extent, this is nothing especially new, the report notes, calling the health care sector “one of the largest contributors to the increase in total high-grade bond issuance over the past decade.”
Lower risk bonds, in aggregate, have nearly tripled since 2008, to total about $609 billion as of the end of September, per Fitch. Today, 30 health care companies are responsible for nearly 90% of industry investment-grade bonds outstanding, the report said.
Notably, CVS issued $40 billion of senior unsecured bonds in support of its Aetna
acquisition, and Cigna issued $20 billion in pursuit of its Express Scripts
deal, Fitch noted.
Read: Medical practices have become a hot investment — are profits being put ahead of patients?
Most of the sector’s outstanding bonds have a composite rating of “BBB,” or 58%, Fitch said; less than 10% of those “BBB”-rated bonds are “BBB-”, which is the lowest of the investment-grade ratings, including Mylan NV
and Allergan PLC
Credit ratings agencies may downgrade company ratings after large acquisitions, depending on the company’s specific situation and financial leverage.
See: More and more health care bills are over $1 million—and expensive drugs are playing a major role
One example of that is Teva Pharmaceutical Industries Ltd.
which was downgraded two notches by Fitch from “BBB-” to “BB” because of debt from the company’s Actavis acquisition and other operational stressors. “BB” is the second highest speculative-grade, or “junk” rating, at Fitch.
The Health Care Select Sector SPDR
was up 1% in Monday trade, and shares have gained 0.4% over the last three months. The SP 500
has dropped 5.6% over the last three months, while the Dow Jones Industrial Average
has declined 3.2%.
Emma Court covers healthcare for MarketWatch from New York. You can follow her on Twitter @EmmaRCourt.
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