Consistent demand for most healthcare products and services has left the overall outlook for the sector largely unchanged; however, ratings are slipping as the industry continues to see consolidation and large acquisitions, according to Fitch Ratings.
Horizontal mergers and acquisitions in the healthcare sector are being fueled by pricing pressure, regulatory changes, activist investor pressure and historically low interest rates, according to Fitch.
"We view M&A and investor appetite for high quality paper, particularly during the late stages of the economic cycle, as major contributors to the rise in investment-grade bond issuance," Fitch says. "However, prospects of enhanced cash flow generation and greater efficiencies of scale are not fully offsetting increased leverage and this is altering the long-term credit risk profile of the sector."
As an industry, healthcare is one of the largest contributors to an increase in total high-grade bond issuance in the past 10 years, according to Fitch. The ratings firm said a concentration of risk may exist, as 10 healthcare firms comprise 51 percent of the investment-grade healthcare bonds outstanding. This is inclusive of CVS Health and Cigna. CVS issued $40 billion of senior unsecured bonds to help fund its $67.5 billion takeover of Aetna, and Cigna issued $20 billion to finance its pending $67 billion purchase of Express Scripts.
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