CNC – Traded CDS 133bps, Base Case iCDS 82bps, Negative Case iCDS 97bps, 2027 4.250% Bond YTW of 3.549%, iYTW of 2.569%, Ba1 Rating from Moody’s, IG3 (equivalent to A2) Rating from Valens, Low Refinancing Need

February 11, 2022

  • Cash bond markets are overstating CNC’s credit risk with a YTW of 3.549% relative to an Intrinsic YTW of 2.569%, while CDS markets are slightly overstating CNC’s credit risk with a CDS of 133bps and Intrinsic CDS of 82bps. 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 enough 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™ analysis of the firm’s Q3 2021 (10/26) earnings call highlights that management is confident they are expanding their footprint to cover more than 75% of eligible Medicare beneficiaries and that they see potential to drive costs savings through streamlined vendor partnerships and non-core platform rationalization

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