Centene readies USD 1.6bn bond backing Fidelis purchase for launch as early as next week

Centene is gearing up to come to market in the coming weeks with the USD 1.6bn bond deal backing its acquisition of Fidelis, said five sources following the deal. The deal was expected to launch earlier this week, but lead underwriter Citigroup pushed out the timeline, and the deal is now expected to come as early as next week, the sources said.

Somewhat choppy trading in Centene’s outstanding debt suggest the health insurance provider’s bonds may require a wider yield than they would have if the deal had come a few weeks ago, two of the sources noted.

Centene’s existing unsecured notes, which will remain outstanding pro forma the buyout financing, rallied in April but then sold off.

Its USD 1.2bn 4.75% bonds due 2025 gained nearly three points in April to trade at 100.25 and 4.689% but have since sold off to trade at 97.625, yielding 5.173%, according to MarketAxess.

The bonds have traded down from 104 and 3.911% in September 2017, when Centene announced that it would purchase fellow insurance provider Fidelis for USD 3.75bn, and that it would finance the deal with a USD 2.6bn equity offering alongside the USD 1.6bn bond placement.

The deal was slated to close by 1 April, and the company had indicated plans to syndicate the debt during the first quarter, according to one of the sources.

But last week the company officially extended the close date to 1 July, citing regulatory approval conditions in New York state.

The equity offering priced on Monday at USD 107.50 per share, and has gained 7.04% to close at USD 115.07 today. Shares were trading at around USD 98 the day after the deal announcement in September.

The merger is likely to be roughly leverage-neutral for Centene this year, estimated an analyst following the company. Leverage is currently around 2.6x and will likely settle around 2.8x by the end of 2018, and decline further thanks to earnings growth in the year after, he said.

Centene will likely face pricing expectations in the mid to high-5% area, given the yield on its existing bonds – currently rated BB+/Ba1 – and those of several comps, sources said.

Bellwether healthcare issuer HCA’s B+/Ba2 ratings USD 1.5bn 5.875% senior unsecured bond due 2026 last traded today at 101.5 to yield 5.619%.

“Centene might come in a bit tight of [HCA], maybe 5.375%, since Centene is higher rated than HCA,” said one buysider.

Medicaid service provider Wellcare’s BB/Ba2 ratings USD 1.2bn 5.25% senior unsecured bond due 2025 last traded on Wednesday (2 May) at 101.125 to yield 4.988%.

Centene’s bonds have widened out by 100bps-140bps since the Fidelis deal was announced in September.

“From when they announced, I’d say they’re going to have to pay 50bps more, and 50bps on USD 1.6bn is not nothing,” said one buysider.

CEO Jeffrey Schwaneke acknowledged as much on the company’s 24 April earnings call, but noted that the equity dynamics have improved. “Bond rates have moved against us, share price has moved in our favor,” he said.

Centene has a managed care segment that provides insurance coverage to individuals through government-subsidized programs like Medicaid, and a specialty services division that offers healthcare services and products to both state and commercial organizations.

2018 Debtwire

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