Fitch Ratings yesterday downgraded West Penn Allegheny Health System to BB-minus from BB and placed the credit on negative watch, while Standard & Poor's placed gave the health care provider on negative watch, affecting $758 million of outstanding debt.
The credit changes follow West Penn's announcement on Monday that it has $73 million fewer in earnings than previously reported. System officials along with West Penn's outside accounting firm have yet to determine over what period of time the $73 million pertains to. That could affect the system's current debt service ratio of 2.5 times as fewer funds available would change that calculation, according to Fitch analyst Jeff Schaub.
"The coverage ratio through March of this year was 2.5 times, which is fairly strong, and depending on how much of the $73 million is allocated to the current fiscal year, that 2.5 times will decline by a greater or lesser amount depending on how much goes to the current fiscal year," Schaub said.
In a prepared statement, Dr. Christopher Olivia, West Penn's president and chief executive officer, said the system will implement "best practice" accounting techniques to prevent overestimates in the future. Tom Chakurda, spokesman for West Penn, declined to answer questions regarding the credit changes or specifics about the accounting error.
"We have undertaken material actions to enhance the management of our organization, and to improve operations and our financial reporting process. What we have gained in this review of our finances is clarity," Olivia said in the press release. "With that clarity we will be able to plan our actions and initiatives with confidence and a sound understanding of what is required of us to achieve our objectives."
Moody's Investors Service rates the credit Ba2 with a stable outlook.
The changes to the credit affects $758 million of Series 2007A fixed-rate bonds that West Penn sold via the Allegheny County Hospital Development Authority in May of last year, one of the largest below-investment-grade bond transactions ever in the muni market.
Standard & Poor's will keep West Penn on negative watch until analysts meet with the system's management in September, and will assess the outlook following the outcome of that meeting.
"After the meeting, we expect, at a minimum, to revise the outlook to negative from stable, however, the rating could also be lowered as well," according to a Standard & Poor's press release.
West Penn does have other challenges as well. Since June 30, 2007, the system's cash on hand has declined to 55 days from more than 80 days and West Penn has experienced a lot of turnover within its management staff, including its chief executive officer, its chief operating officer, and its chief financial officer.
Conversely, the health care provider has a strong market presence, is well respected in particular for its high-end services such as quaternary care.
"They have a reputation for sub-specialties that are the most complex in the health care business and their quality marks and awards and recognitions are first rate, so, they have that. " Schaub said. "They also have a sizeable market share in the Pittsburgh market, there's [the University of Pittsburgh Medical Center] with almost two-thirds of the market, but these guys are sitting there with a quarter of very large market. And that market share's been very stable and the utilization of their facilities has been fairly stable for the past several years."
The West Penn system came together, in part, from the demise of the Allegheny Health, Education and Research Foundation when that system declared bankruptcy in 1998 with $555 million of outstanding debt. Industry-wide challenges and weak internal management contributed to the historic bankruptcy and the Security and Exchange Commission later held Allegheny Health accountable for overstating net income by millions of dollars. Allegheny General Hospital, once a part of Allegheny Health and located in northern Pittsburgh, is now a flagship hospital in the West Penn system.