CNC – Base Case CDS 206ps, Base Case iCDS 70bps, Negative Case iCDS 71bps, 2027 4.250% Bond YTW of 5.650%, iYTW of 4.290%, Ba1 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

May 25, 2023

  • Credit markets are overstating CNC’s credit risk with a YTW of 5.650% and a CDS of 206bps, relative to an Intrinsic YTW of 4.290% and an Intrinsic CDS of 70bps. Furthermore, Moody’s is overstating CNC’s fundamental credit risk with its Ba1 credit rating three notches below Valens’ IG4+ (Baa1) credit rating.
  • Incentives Dictate Behavior™ analysis highlights mostly mixed signals for credit holders. Most management members are material owners of CNC equity relative to their annual compensation, indicating they may be well-aligned with shareholders in terms of long-term value creation. Moreover, most management members have low change-in-control compensation relative to their average compensation, indicating they are unlikely to pursue a takeover or accept a sale of the company, decreasing event risk for creditors.
  • Earnings Call Forensics™ of the firm’s Q1 2023 earnings call (04/25/2023) highlights that management generated an excitement marker when saying 2023 enrollment growth will provide an earnings tailwind in 2024 that will help offset other operational headwinds. In addition, management is confident they’re building a digital operating structure centered around customer relationships and working to rebuild the business given the decentralization of Wellcare operations. Moreover, management is confident their technology investments won’t have an impact on long-term Medicare business margins and that they are laying the groundwork for the Health Equity index adjustment that CMS will measure in 2024-2025.

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