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Highmark, West Penn, Bondholders Settle on a Haircut

JAN 16, 2013 6:02pm ET
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Officials from Highmark Inc. and West Penn Allegheny Health System, both of Pittsburgh, announced late Wednesday an agreement with West Penn bondholders on a debt-mitigation plan that they said would clear a path for an affiliation agreement without putting West Penn Allegheny into bankruptcy.

Under the agreement, Blue Cross Blue Shield insurer Highmark has offered to purchase the outstanding Series 2007A bonds that the Allegheny County Hospital Development Authority issued for West Penn for cash at 87.5 cents on the dollar.

West Penn issued $726 million of junk-level bond debt in 2007, which made it one of the largest speculative-grade issuers in the municipal marketplace.

UMB Bank of Kansas City, Mo., the master trustee for West Penn’s bondholders, scheduled a call for Thursday morning, according to a statement posted on the Municipal Securities Rulemaking Board’s EMMA website.

West Penn and Highmark said in a joint statement that the deal preserves the pension plans of 12,000 employees of West Penn, the second-largest health system in western Pennsylvania behind the University of Pittsburgh Medical Center.

The organizations will present the plan to the Pennsylvania Insurance Department for approval. The department last month warned the organizations to provide more information.

“We are glad to have reached common ground with everyone,” said Highmark chief executive William Winkenwerder.

West Penn board chairman Jack Isherwood added: “We are pleased that West Penn Allegheny, our bondholders and Highmark have reached this important milestone to help further our pending affiliation with Highmark.”

The companies announced a $475 million agreement late in 2011, then West Penn called it off in late September after Winkenwerder, shortly after succeeding the fired Kenneth Melani as Highmark CEO, wanted West Penn to file for bankruptcy as a means of lightening its debt assumption.

After an Allegheny County judge restrained West Penn from talking with other suitors, the parties returned to the table.

The three major credit rating agencies downgraded West Penn’s bonds over the past three months. In the most recent move, Fitch Ratings on Friday lowered them to C. Standard & Poor’s rates them bonds CC, while Moody’s Investors Service assigns a Ca rating.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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