Cigna Debt Buyback Opportunity

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About: Cigna Corporation (CI)
by: Zac Thompson
Summary

Cigna offers to purchase up to $1B worth of principal amount of its debt securities.

Many of the target notes will be repurchased at a premium.

Cigna's capital restructuring presents an opportunity for short-term investors to purchase Cigna notes and submit them for purchase at a profit.

Introduction

Cigna Corporation (NYSE:CI) is an American-based worldwide health service provider, with its insurance subsidiaries providing medical, dental, disability, and life insurance. Cigna's services are often provided to individuals as employee benefits packages, while Cigna also offers Medicare and Medicaid products on an individual level.

On Tuesday, September 5, 2017, Cigna Announced Tender Offers for up to $1 Billion in Aggregate Principal Amount of Certain Series of Its Outstanding Senior Notes. Not only will this capital restructuring lower Cigna's interest expense, it will also shift the debt/equity ratio and reduce its leverage.

With Cigna's debt buyback program, the various notes will be purchased in accordance with a priority hierarchy system, and the purchase price for some of the notes reflects a price that is currently greater than market value. In addition to the consideration note-holders will receive, accrued interest will also be paid for periods between the submission date and the payable date. Finally, there is an early submission deadline associated with the offer that amplifies the premium holders will receive, representing an opportunity for short-term investors to purchase the Cigna notes and submit them for the buyback offer.

The Offer

The target notes and their prices can be seen in the following chart, with dollar amounts per $1,000 principal amount.

Notes Cusip Amount Outstanding Priority lvl Consideration Total Consideration
8.3% due 2033 125509BE8 $83.14M 1 $1,457.06 $1,487.06
6.15% due 2036 125509BH1 $500M 2 $1,296.80 $1,326.80
5.875% due 2041 125509BQ1 $300M 3 $1,292.86 $1,322.86
5.375% due 2042 125509BT5 $750M 4 $1,231.63 $1,261.63
7.875% due 2027 125509AZ2 $300M 5 $1,370.35 $1,400.35
8.3% due 2023 125509AG4 $16.86M 6 $1,252.58 $1,282.58
7.65% due 2023 125509AH2 $100M 7 $1,234.82 $1,264.82

The offer "consideration" is payable to holders that submit their notes after the early deadline of September 18 but before the offer expiration of October 2, but those that submit prior to that date will receive the "total consideration," which includes an extra premium of $30 per $1,000 principal amount. The following chart shows the notes' considerations compared to their current respective market values.

(As of 9/5/17)

Notes Cusip Consideration Total Consideration Market Price (per $100)
8.3% due 2033 125509BE8 $1,457.06 $1,487.06 $139.26
6.15% due 2036 125509BH1 $1,296.80 $1,326.80 $128.90
5.875% due 2041 125509BQ1 $1,292.86 $1,322.86 $127.16
5.375% due 2042 125509BT5 $1,231.63 $1,261.63 $120.87
7.875% due 2027 125509AZ2 $1,370.35 $1,400.35 $135.66
8.3% due 2023 125509AG4 $1,252.58 $1,282.58 $126.28
7.65% due 2023 125509AH2 $1,234.82 $1,264.82 $125.03

Proration

Cigna only seeks to buy up to $1B principal amount of its notes. Therefore, proration is a threat that offer participants may face. If the offer is oversubscribed, Cigna will purchase the notes on a pro-rata basis, with any amount not purchased being returned to the holder. Though Cigna will resume its obligations on any refunded debt, that debt will then be subject to market risk. Though proration presents a unique risk to arbitrage seekers in these buyback opportunities, it may sometimes be avoided entirely. Participants in this offer should pay extra attention to a given note's principal amount outstanding, its priority level, and the profit spread.

The Options

Not all of the notes are "in-the-money." Certain notes, as listed above, are being repurchased for a price that is less than the current market value, and those notes should be avoided entirely for short-term investors. Investors seeking to engage in this offer should look to buy and submit notes that are at a high acceptance priority level, have large profit spreads, and have low principal amounts outstanding. Fortunately, for this offer, the 8.3% notes and the 6.15% notes occupy the # 1 and # 2 spot, respectively, on the priority hierarchy, and these notes have generous profit spreads. One should keep in mind, however, that the 6.15% notes still have $500M outstanding, and are therefore subject to high risks of proration, while the 8.3% notes only have $83M outstanding. One can assume that most if not all of the 8.3% notes will be bought back, and therefore, present the best opportunity for engaging in this offer. Opportunity may also be found elsewhere in the offer with some of the notes occupying the lower levels of acceptance priority, but these notes are also subject to proration, given Cigna's preference towards the notes higher up the chain. For best results, short-term investors should purchase and submit the 8.3% (due 2033) notes for the buyback offer.

Other considerations:

The total considerations are hypothetical at this point. Cigna has designated 09/18/17 as the price determination date, but the actual price and hypothetical price will be similar amounts. Notes must be submitted in minimum denominations of $1,000 principal amount.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.