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Rating Action:

Moody's rates Molina's senior notes Ba3; outlook negative

22 May 2017

Company issuing $330 million of senior notes due 2025

New York, May 22, 2017 -- Moody's Investors Service has assigned a Ba3 senior unsecured debt rating to Molina Healthcare Inc.'s (Molina, NYSE: MOH) planned issuance of up to $330 million of senior unsecured debt ("New Senior Notes) to mature in 2025. Net proceeds from the planned offering are expected to be used to pre-fund the repayment of the existing 1.625% Convertible Senior Notes due 2044 ("Convertible Notes") -- on or around August 20, 2018 when the Convertible Notes can be put to MOH by investors -- and to pay interest on the new senior notes until August 20, 2018. The rating outlook on Molina is negative.

RATINGS RATIONALE

Following the debt offering, the company's financial leverage metrics will be elevated until the proceeds are used to repay debt in August 2018. Assuming a $330 million issuance, Molina's pro forma 31 March 2017 adjusted-debt-to-capital is 56.5% versus actual 52.5% at 31 March 2017. The Convertible Notes include a put provision (exercisable on August 20, 2018 if MOH's share price is below $58.09) allowing investors to accelerate repayment of the notes. Alternatively, If the put option is not exercised, we expect Molina will use the transaction proceeds to reduce indebtedness either by calling the Convertible Notes or by repaying the New Senior Notes. Moody's notes that a use-of-proceeds covenant of the New Senior Notes specifies that, until August 20, 2018, transaction proceeds may be used only to fund redemptions of the Convertible notes and pay interest on the New Senior Notes.

The proposed transaction bolsters Molina's liquidity profile by providing mechanism for debt reduction while maintaining the company's existing liquidity resources, including a holding company cash target approximating $250 ($273 million at 31 March 2017), $192 million of statutory dividend capacity from its regulated insurance operations in 2017, and the company's $500 million unsecured revolving credit facility (largely undrawn at 31 March, 2017).

Moody's Baa3 insurance financial strength (IFS) rating of Molina Healthcare Inc.'s (Molina's) operating subsidiaries and Ba3 senior unsecured debt rating of Molina are based primarily on the company's concentration in the Medicaid market, acquisitive nature, low margins, and high level of financial leverage. These negatives are offset by the company's multi-state presence and a non-regulated management information systems business. Molina offers government sponsored health care products for low-income families and individuals, and to state agencies to assist them in their administration of the Medicaid program. As of March 31, 2017, Molina served approximately 4.8 million members. The negative outlook on Molina and its affiliates reflects our view of potentially greater operational risks at the company, and secondarily, increased uncertainty on the impact of future healthcare reform on the Medicaid Market. We view the company's recent decision to seek a new CEO and to have named a new CFO as part of its effort to remediate these challenges. The company reported good results for Q1 2017 including pre-tax net income of $131 million (vs $64 million in Q1 2016) including stable profitability consistent with expectations in its Marketplace business and its Medicare and Medicaid programs. Earnings also benefited by a one-time payment of $75 million related to the termination of a proposed Medicare acquisition.

RATING DRIVERS

The rating agency stated that since Molina's outlook is negative, an upgrade in the near-term is unlikely; however, the outlook may be returned to stable if the following occur: 1) Remediation of the material weakness and avoidance of significant operational disruptions, 2) maintenance of stable earnings including marketplace results, and 3) consolidated risk-based capital (RBC) ratio of 140% of company action level (CAL) or higher. However, Moody's said that the ratings may be downgraded if: 1) There is a loss or impairment of a major Medicaid contract, 2) the consolidated RBC ratio falls below 130% CAL, and 3) additional debt issuance increases financial leverage above 55%.

Moody's has assigned the following ratings:

Molina Healthcare, Inc. -- senior unsecured debt rating at Ba3.

The rating outlook is negative.

Molina Healthcare, Inc. is headquartered in Long Beach, California. For the quarter ended March 31, 2017 total revenue (including investment income) was $4.9 billion and net income $77 million. Medical membership as of March 31, 2017 was approximately 4.8 million members. As of March 31, 2017 the company reported total equity of $1.7 billion.

The principal methodology used in these ratings was U.S. Health Insurance Companies published in May 2016. 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.

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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.

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Pano Karambelas
VP - Senior Credit Officer
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

Marc R. Pinto, CFA
MD - Financial Institutions
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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