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Rating Action:

Moody's downgrades Molina Healthcare's ratings; outlook changed to stable

16 Feb 2018

New York, February 16, 2018 -- Moody's Investors Service has downgraded the senior unsecured debt ratings of Molina Healthcare, Inc. (Molina, NYSE: MOH) to B3 from B2 and the insurance financial strength (IFS) ratings of six of Molina's regulated operating subsidiaries (see list below) to Ba2 from Ba1. The outlook on Molina, a provider of government sponsored health care products for low-income families and individuals, and its rated operating subsidiaries has been changed to stable from negative. These actions reflect our assessment that Molina's credit profile has further weakened following the loss of two significant Medicaid contracts since the start of 2018 as well as the company's significant operating loss in 2017. Positively, Molina is in the midst of a company-wide restructuring and expense-cutting program. The company has already achieved significant cost savings, and many of the operational improvements are underway.

RATINGS RATIONALE

The primary cause of the downgrade is the recent loss of significant Medicaid contracts in New Mexico and Florida, effective January 1, 2019. These contracts combined represented approximately 15% of Molina's premium revenue in 2017 and will result in the loss of approximately 500 thousand members. At year-end 2017, Molina served approximately 4.5 million members. While the Medicaid contracts Molina lost have been unprofitable, returning them to profitability was a key management objective. In addition, the company posted an operating loss of $555 million for 2017, reflecting significant goodwill impairment, restructuring charges as well as a the cost related to the Federal government's decision to stop paying cost sharing subsidies along with losses in a number of health plans and the ACA marketplace. The losses reflect numerous operating weaknesses, including being cited for a material weakness by its auditors.

Moody's B3 senior unsecured debt rating reflects the company's constrained financial flexibility as adjusted debt to capital is very high at 64.5%. It also reflects Molina's weakened market position after losing two Medicaid contracts and uncertainty regarding the execution of its restructuring and profit improvement plan. Molina's management, led by the new CEO, Joseph Zubretsky, is taking wide-ranging steps to improve Molina's operations and reduce costs. The plan covers things such as improved utilization controls, reducing the unit cost of high cost providers, improved care management and coordination of services and better documentation of medical conditions among other initiatives. While some of these changes can be implemented quickly, it is too early to assess any results. We note the company is making progress on expenses, and has realized run-rate expense savings of $235 million as of year-end 2017. The company's turnaround efforts are also supported by its multi-state presence.

The rating also considers potential strains on parent liquidity. The company has convertible notes maturing in 2020 ($550 million) and 2044 ($160 million). However, given triggers in the note agreements, note holders have the right under certain conditions related to Molina's share price to exchange the notes for cash. Furthermore, in 2017 liquidity was also strained by the parent's need to make net infusions of capital into its subsidiaries. However, these risks are mitigated by several factors: (1) the parent company had $696 million in cash as of December 31, 2017; (2) the 2044 notes are covered by restricted cash, while the 2020 notes are covered by a $550 million 364 day bridge loan facility, which management put in place to address the risk that all the note holders exercise their option to exchange; and (3) due to the operational improvements being implemented by management, the need for large capital infusions is likely to diminish going forward.

The rating action maintains the four notch differential between the Ba2 IFS and B3 senior unsecured debt, which is greater than Moody's standard three notch differential for insurance groups. The wider notching represents the increased potential for loss to debt holders relative to policyholders for issuers with below investment grade IFS ratings.

Moody's Ba2 IFS rating of Molina's operating subsidiaries and B3 senior unsecured debt rating of Molina are based primarily on the company's concentration in the Medicaid market and numerous operational weaknesses that resulted from its rapid growth in recent years. These factors have contributed low margins, a high level of financial leverage compared to peers (adjusted debt to capital of 64.5% at 31 December 2017) and led to the significant losses in 2017. Despite these problems, Moody's notes that four of the company's largest Medicaid plans -- California, Ohio, Texas and Washington -- accounting for 52% of total revenue, were profitable in 2017.

RATINGS DRIVERS

Factors that could lead to rating upgrades, include: (i) a return to profitability in line with the company's 2018 guidance along with remediation of the material weakness; and (ii) adjusted debt to capital declines below 60% and debt to EBITDA declines below 5.5x; and (iii) the company is successful in upcoming Medicaid contract re-procurements.

Factors that could lead to rating downgrades include: (i) a breach of any loan covenant; or (ii) an operating loss in 2018; or (iii) a further 15% decline in membership beyond the impact of the ACA marketplace pullback and the impact from the loss of the New Mexico and Florida Medicaid contracts.

The following ratings were downgraded:

..Issuer: Molina Healthcare, Inc.

....Senior Unsecured Regular Bond/Debenture, to B3 from B2

..Issuer: Molina Healthcare of California

....Insurance Financial Strength, to Ba2 from Ba1

..Issuer: Molina Healthcare of Michigan, Inc

....Insurance Financial Strength, to Ba2 from Ba1

..Issuer: Molina Healthcare of New Mexico, Inc

....Insurance Financial Strength, to Ba2 from Ba1

..Issuer: Molina Healthcare of Ohio, Inc

....Insurance Financial Strength, to Ba2 from Ba1

..Issuer: Molina Healthcare of Texas, Inc.

....Insurance Financial Strength, to Ba2 from Ba1

..Issuer: Molina Healthcare of Washington Inc

....Insurance Financial Strength, to Ba2 from Ba1

Outlook Actions

..Issuer: Molina Healthcare, Inc.

..Issuer: Molina Healthcare of California

..Issuer: Molina Healthcare of Michigan, Inc

..Issuer: Molina Healthcare of New Mexico, Inc

..Issuer: Molina Healthcare of Ohio, Inc

..Issuer: Molina Healthcare of Texas, Inc.

..Issuer: Molina Healthcare of Washington Inc

....Outlook, changed to stable

Molina Healthcare, Inc. is headquartered in Long Beach, California. In 2017 total revenue (including investment income) was $19.9 billion with a net loss of $512 million. Medical membership as of December 31, 2017 was approximately 4.5 million members. As of December 31, 2017 the company reported total equity of $1.3 billion.

The principal methodology used in these ratings was U.S. Health Insurance Companies published in October 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dean Ungar
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Scott Robinson
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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