Fitch Ratings on Thursday downgraded West Penn Allegheny Health System's roughly $737 million Series 2007A revenue bonds three notches, to CCC from B-plus, citing uncertainty over the hospital operator's proposed affiliation with insurer Highmark Inc.
Both organizations are based in Pittsburgh.
The Allegheny County Hospital Development Authority issued the bonds. West Penn's bonds were one of the largest speculative-grade issues in the municipal marketplace.
"The downgrade to CCC reflects the increased possibility of a debt restructuring, coupled with and arising from heightened uncertainty about the progress of [West Penn's] affiliation with insurer Highmark," Fitch said in a report.
"The credit situation remains volatile and dependent on the outcome of litigation, the involvement of government entities, the release of financial information by [West Penn], and the possible resumption of discussions between WPAHS and Highmark," Fitch added.
Late last month, West Penn, the second-largest hospital network in western Pennsylvania, announced it would pull out of its $475 million affiliation agreement with Blue Cross Blue Shield insurer Highmark, after Highmark, looking to minimize its debt exposure, insisted that West Penn file for bankruptcy.
West Penn reported a loss of $88 million through the first nine months of fiscal 2012.
The two organizations have since sued each other. The Allegheny County Court of Common Pleas on Thursday began a hearing on Highmark's challenge to prevent West Penn from talking with other suitors.
Fitch in June had affirmed its B-plus rating and revised the outlook to stable largely based on the progress of the Highmark affiliation. But new Highmark chief executive William Winkenwerder, who took over from the fired Kenneth Melani after the latter got into a public fistfight with his girlfriend's husband, in August insisted on the bankruptcy.
On Sept. 28, when West Penn announced the pullout, Fitch put the hospital chain on rating watch negative.
Standard & Poor's and Moody's Investors Service also have West Penn under review. Standard & Poor's rates the system B-minus, while Moody's assigns its Caa1 rating.