UnitedHealth Group (UNH) Outlook Lowered to Negative by S&P Following Proposed Catamaran Deal

The outlook revision is driven by the large amount of additional debt (based on the purchase price) that we expect UNH to issue to finance its acquisition of Catamaran Corp. We expect the additional debt to raise the company's financial leverage to more than 45% as of year-end 2015. Although we believe that UNH will reduce leverage to historical levels of less than 40% via a combination of significantly reduced share repurchases and debt repayment during the next few years, we also believe that that the additional debt, which would be a significant increase from current levels, makes UNH an outlier among its peers and places stress on the operating companies through double leverage. We expect adjusted EBITDA coverage (which includes imputed interest on operating leases) to remain well more than 10x during the next few years.

"We believe that the acquisition is a strategic fit for UNH, expanding the company's pharmacy benefits-management presence as the combination of Catamaran with UNH's Optum Rx subsidiary will result in the third-largest pharmacy benefit manager in the U.S.," said Standard & Poor's credit analyst Neal Freedman. We expect the acquisition to be accretive to EBITDA and unregulated cash flow. UNH remains the established market leader across all key health-benefits segments (particularly in the higher-growth and more operational-sensitive government-sponsored segments), possesses extensive technological capabilities, and continues to demonstrate well-developed insights about prospective risks and opportunities in the health care sector.

The negative outlook reflects our concern regarding the expected high financial leverage relative both to peers' and to historical levels, as well as the relatively tight time frame for UNH to bring the leverage back down to historical levels. If the company raises more debt than we expect or if it becomes apparent that the company will not be able to reduce its financial leverage to less than 40% during the next few years, we could lower the ratings by one notch. Conversely, if it becomes apparent that UNH will lower its financial leverage during the next few years to historical levels, we would likely affirm the current ratings with a stable outlook.