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Agency Cuts Rating On Health Net Debt

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Moody’s Investors Service, New York, has cut its rating on senior unsecured debt issued by Health Net Inc., Los Angeles.[@@]

The move will lower the rating on the debt to Ba1, from Baa3, and it will increase the interest rate on the company’s senior notes to 9.875%, from 8.375%, Health Net says.

Moody’s estimates the rate cut affects about $400 million in debt.

Health Net provides or administers health coverage for 5.2 million people.

The downgrade is “the result of a higher degree of uncertainty with respect to Health Net’s earnings and membership over the next several quarters as well as the reduced financial flexibility of the company,” Moody’s says in a comment on the rate cut.

Health Net reported higher than expected hospital costs in California for the first quarter, and it also reported higher costs in the Northeast, Moody’s says.

Health Net counts some notes from its parent company and other affiliates in its capital, but Moody’s says it does not give credit in its adjusted risk-based capital calculation for those assets.

Moody’s might raise Health Net’s debt rating if the company’s annual net margins increase to 3%, but it might cut the rating further if annual net margins fall below 2%.

Health Net has responded to the rate by emphasizing that it already is taking action to cut its costs and increase its capital levels.

“It is important to note that Health Net’s financial condition remains sound and, as previously disclosed, our operating results are improving,” the company says in a statement.

Health Net points out that it has $1.6 billion in cash and investments.