Bonds of WellPoint Inc. (WLP:US) reached the highest price since issued after the second-biggest U.S. health insurer said it agreed to buy Amerigroup Corp. (AGP:US) for $4.9 billion in cash to expand the number of Medicaid patients it serves.
The Indianapolis-based insurer’s $900 million of 4.625 percent notes maturing in 2042 increased to as high as 105.3 cents on the dollar to yield 4.31 percent before falling back to 104.4 cents as of 12:01 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest yield since the debt was issued May 2.
Obligations of WellPoint, whose debt outperformed competitors last month, are rising even as Fitch Ratings said it may cut the insurer’s credit grade by as many as two levels as the company borrows to acquire Amerigroup and boosts its ratio of debt to earnings before interest, taxes, depreciation and amortization to more than 2.5 times. That would be the highest among any U.S. managed-care company, according to data compiled by Bloomberg. Fitch gives WellPoint an A- senior unsecured debt rating, four levels above junk.
WellPoint’s acquisition of high-yield Amerigroup, which has $475 million (AGP:US) of obligations outstanding, will make it the top private manager of Medicaid benefits in the U.S., with 4.5 million members in the program. The U.S. Supreme Court upheld President Barack Obama’s plans to add 17 million patients under Medicaid in a ruling two weeks ago, though it limited the administration’s ability to mandate state participation in the expansion.
High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s and Fitch.
WellPoint bonds returned 0.79 percent in June, the most among industry peers that averaged 0.43 percent, according to Bank of America Merrill Lynch index data. UnitedHealth Group Inc. (UNH:US) is the nation’s largest health insurer by revenue.
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