Horizontal mergers and acquisitions in the healthcare sector are being fueled by pricing pressure, regulatory changes, activist investor pressure and historically low interest rates, according to Fitch.
“We view M&A and investor appetite for high quality paper, particularly during the late stages of the economic cycle, as major contributors to the rise in investment-grade bond issuance,” Fitch says. “However, prospects of enhanced cash flow generation and greater efficiencies of scale are not fully offsetting increased leverage and this is altering the long-term credit risk profile of the sector.”
As an industry, healthcare is one of the largest contributors to an increase in total high-grade bond issuance in the past 10 years, according to Fitch. The ratings firm said a concentration of risk may exist, as 10 healthcare firms comprise 51 percent of the investment-grade healthcare bonds outstanding. This is inclusive of CVS Health and Cigna. CVS issued $40 billion of senior unsecured bonds to help fund its $67.5 billion takeover of Aetna, and Cigna issued $20 billion to finance its pending $67 billion purchase of Express Scripts.
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