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CNC – CDS 125bps, Base Case iCDS 89bps, Negative Case iCDS 108bps, 2026 5.375% Bond YTW of 1.928%, iYTW of 1.658%, Ba1 Rating from Moody’s, IG3 (equivalent to A2) Rating from Valens, Low Refinancing Need

May 17, 2021

  • Credit markets are accurately stating CNC’s credit risk with a YTW of 1.928% and CDS of 125bps relative to an Intrinsic YTW of 1.658% and Intrinsic CDS of 89bps. Meanwhile, Moody’s is materially overstating the firm’s fundamental credit risk, with its non-investment grade Ba1 credit rating five notches lower than Valens’ IG3 (A2) credit rating
  • Incentives Dictate Behavior™ analysis highlights mostly positive signals for credit holders. Management’s compensation framework should drive them to focus heavily on margin expansion and revenue growth, which may lead to Uniform ROA improvement and higher cash flows available for servicing obligations. In addition, management members are not well-compensated in a change-in-control scenario, indicating they are unlikely to pursue a sale or accept a buyout of the firm, limiting event risk. Furthermore, management members are material holders of CNC equity relative to their annual compensation, indicating they should be aligned with shareholders for long-term value creation
  • Earnings Call Forensics™ of the firm’s Q1 2021 earnings call (4/27) highlights that management is confident their Medicare Advantage performance will give them room for margin expansion, that the business will experience tailwinds for the remainder of 2021, and that the Oklahoma contract win for the Medicare business will drive further growth. In addition, they are confident state rate and risk-sharing mechanisms will positively impact revenue and that nothing unusual is happening with prior year claims development (PYD)