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Credit Insights

Summer Slowdown Takes Hold in Secondary Markets, but Idiosyncratic Risk Remains

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With organic growth extremely tough to generate in the low-growth global environment, management teams have looked to strategic mergers and acquisitions as well as financial engineering to enhance shareholder value. This company-specific idiosyncratic risk, which often leads to downgrades, has been the biggest risk to bondholders over the past few years. The health-care industry has been one of the most active sectors engaging in M&A, and that trend is continuing. Julie Stralow, Morningstar's health-care credit analyst, first pointed out this emerging theme in her third-quarter 2012 outlook and further detailed the potential for a long-term trend toward strategic acquisitions in her report "Spread-Widening Events Possible in Big Pharma Niche," published in August 2012.

Most recently in the health-care sector, reports have surfaced that major players in the managed-care industry were seeking to merge, but because no deals have been agreed upon, we have kept all our credit ratings intact for now. However, we recommend using caution when considering bonds of key players, given the potential for debt leverage to rise substantially if deals are made. In addition to Cigna (CI) (rating: BBB-, no moat) already at an underweight recommendation, we have changed our bond recommendations on potential acquirers Anthem (ANTM) (rating: BBB+, narrow moat) and Aetna (AET) (rating: BBB+, narrow moat) to underweight on the basis of these reports.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.