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United Healthcare off-balance-sheet debt and risk of default



December 01, 2008 – Comments (3) | RELATED TICKERS: UNH

Why does UNH have $17B worth of commercial paper off-balance-sheet?  If you add that debt to the balance sheet, it would put them dangerously close to violating their loan covenants and putting them in default!  What is the risk this debt will come back on the balance sheet some day?

I sent this question to the Ask the Stock Advisor Team message board over a week ago and I haven't heard a response, so I'm posting it to the CAPS community. 

I am referring specifically to the off-balance-sheet arrangements, page 35 of the 2007 fiscal year 10-K.  In each 2008 10-Q it refers you back to the '07 10-K

It shows $11B worth of commercial paper and $6B worth of interest as off-balance-sheet. I'm new to this, so I don't understand why commercial paper would be off the balance sheet. UNH didn't offer any explanation in the 10-K.

Now, if you added the $17B of off-balance-sheet commercial paper to the liabilities on the balance sheet, that would put UNH dangerously close (49%) to the maximum Debt-to-Capitalization ratio (50%) allowed in some of their loan covenants.

This leaves me with the following questions. Does this commercial paper really belong off the balance sheet? What are the odds of this coming back onto the balance sheet?

I own shares of UNH, though they aren't worth very much anymore.

Thanks in advance!

3 Comments – Post Your Own

#1) On December 01, 2008 at 10:34 AM, ikkyu2 (98.17) wrote:

I can't answer your specific question, but Howard Schlitt's Financial Shenanigans is a decent introduction to these topics.  I wish I understood it better myself.

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#2) On December 01, 2008 at 12:02 PM, cubanstockpicker (21.00) wrote:

Sound like Lehman all over again and LEH was less than that when the bears came in and wiped it out. Maybe Time to sell and short? I am going to be reading this closely and thanks for the heads up.

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#3) On December 01, 2008 at 8:22 PM, Imperial1964 (92.46) wrote:

I'm not sure there's anything left to short.  It's down 70% this year. 

If I were forced to speculate I would probably go long just because it fits the profile of a beat-down, oversold, big-cap.  Earnings should pick up in another year or two when employment eventually begins to pick up.  Either way it is a big gamble, in my opinion.

I'm still holding UNH, but I sure ain't buying more.  I wish I went with my gut and sold when I found out they were taking on debt to buy back shares.  I might sell if it goes up a little more and I find somewhere else I want to put the money.

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