Standard & Poor's puts Aetna, Humana on credit watch following DOJ move to block merger

S&P Global Ratings has placed Aetna and Humana on creditwatch following the Department of Justice's announcement Thursday to block their merger.

S&P said it has placed its ratings on Aetna on creditwatch with developing implications, and on Humana and its core subsidiaries on creditwatch with negative implications.

The DOJ also blocked the merger between Anthem and Cigna on Thursday.  S&P said its ratings on the two insurers would remain on creditwatch negative, where they were placed on June 21, 2015.

Anthem and Aetna have both said they would fight the DOJ's injunction against their respective mergers in court.

For Anthem's proposed $53 billion acquisition of Cigna, litigation could be difficult and time-consuming, S&P said.

"However, it would leave the possibility of a merger open and potential downgrades upon deal financing," S&P said. "If the companies terminate the merger, we could remove the ratings on both companies from creditwatch. We expect to resolve the creditwatch once the lawsuit is resolved or the merger is terminated."

[Also: DOJ sues to block Anthem/Cigna, Aetna/Humana mergers as companies plan to fight back]

The insurers could also agree to terminate the mergers.

If Aetna ends the merger with Humana, it would have to pay Humana $1 billion in a termination fee.  Anthem would have to pay Cigna $1.8 million in a termination fee.

Of Aetna, S&P said, "We believe that deal termination, despite the incurrence of a $1 billion deal break-up fee, would likely have a positive impact on Aetna's financial risk profile given the requirement for significant repayment of debt issued to fund the deal," said S&P Global Ratings credit analyst Joseph Marinucci. "Conversely, we believe that Aetna's intent to litigate could meaningfully extend the timeline to resolution. As a result, financial leverage and associated debt service could be meaningfully worse through the 2017 period. We believe this would likely have a negative credit impact on Aetna's financial profile."

A deal termination would also likely have a negative impact on Humana's credit profile as it would remove the benefit associated with being a core component of a larger, more well-diversified enterprise, S&P said.

The creditwatch developing placement for Aetna reflects the potential that S&P could raise its ratings on the company by one notch in connection with deal termination.

[Also: Humana stock plummets as merger with Aetna given marginal odds of going through]

The creditwatch negative placement for Humana reflects the potential S&P could lower its ratings on that company and its core subsidiaries by one notch if it no longer views the company as having core status to a newly-formed Aetna enterprise stemming from its very meaningful contribution to current and prospective revenue, earnings, cash flow, and capital, S&P said.

"We will resolve the creditwatch placements after we evaluate additional details and assess potential responses," Marinucci said.

Only a rating committee may determine a rating action and this report does not constitute a rating action.

The day the DOJ announced the lawsuits, Humana said it would discontinue certain on-exchange individual products across a number of areas for 2017 and exit substantially all Affordable Care Act compliant off-exchange individual markets.

For 2017, Humana is expected to cover no more than 156 counties across 11 states, down from 1,351 counties across 19 states in 2016.

The company is experiencing better-than-expected performance across several of its businesses primarily being driven by better-than-expected performance in the company's individual Medicare Advantage and healthcare services businesses.

Humana expects 2017 premiums associated with ACA-compliant offerings in the range of $750 million to $1 billion, versus approximately $3.4 billion projected for 2016.

S&P said the ratings on Humana Health Plans of Puerto Rico and Humana Insurance of Puerto Rico and Kanawha Insurance remain unaffected by the DOJ announcement.

Twitter: @SusanJMorse