Moody’s Investors Service has placed the Caa1 bond rating of West Penn Allegheny Health System, one of the top speculative-grade issuers in the municipal market, under review for possible downgrade after it terminated its $475 million merger agreement with fellow Pittsburgh health care provider Highmark Inc.

Moody’s announced the action, which affects roughly $737 million of Series 2007 fixed-rate bonds issued through the Allegheny County Hospital Development Authority, late Friday, right after West Penn Allegheny officials canceled the merger.

At a press conference, West Penn board chairman Jack Isherwood said Highmark had insisted on a restructuring through bankruptcy among a list of new demands, and that the demands amounted to a breach of their agreement from last November.

“Our impending partnership is over,” Isherwood said. “We have never considered bankruptcy as an option.”

West Penn, countering Highmark’s assertion that bond debt was a key financial hurdle to finalizing the deal, said its debt level has not changed since November, except for the addition of loans from Highmark that were part of the affiliation agreement.

Since April 2001, according to the Pittsburgh Post-Gazette, Highmark pumped $400 million in equal parts loans and grants, to help West Penn reopen the latter’s emergency department in Bloomfield and renovate Forbes Regional in Monroeville.

The deal was pending approval from the state’s insurance department.

In a statement, Highmark said it “categorically denies the claim by West Penn Allegheny Health System that Highmark has breached the affiliation agreement between us.”

Moody’s last November downgraded West Penn to Caa1 from B2. It reaffirmed that rating in June, noting that even with Highmark’s financial support it may not be enough money to keep the hospital afloat. Moody’s rated Highmark Baa2. Both have negative outlooks.

According to Moody’s, through nine months of fiscal 2012, ending March 31, West Penn reported an operating loss of $88 million, exceeding its $75 million loss in all of fiscal 2011. 

The Pittsburgh Post-Gazette reported that on Aug. 30, new Highmark chief executive William Winkenwerder Jr. told West Penn officials that they wanted the target health system to file for bankruptcy.

Winkenwerder was U.S. assistant secretary of defense for health affairs during the administration of George W. Bush.

Isherwood said West Penn had recommended alternatives to debt restructuring and bankruptcy, but Highwood was adamant.

“Dr. Winkenwerder and his team have been crystal clear in their position that if they assume the fiscal burdens of West Penn Allegheny Health System, they will put Highmark’s financial portfolio, and ultimately, their subscribers, at risk,” Isherwood said.

“The only way out, in their analysis, is to put the patients, nurses, physicians and suppliers of the West Penn Allegheny Health System at risk through debt restructuring and bankruptcy.”

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