Moody's Investors Service on Tuesday downgraded West Penn Allegheny Health System's bond rating to Ca from Caa1, affecting $726 million of Series 2007 fixed rate bonds issued through the Allegheny County Hospital Development Authority. The outlook remains negative.

Moody's on Sept. 28 had placed the Pittsburgh health provider's rating on review for possible downgrade, after it announced the termination of its agreement with Blue Cross Blue Shield provider Highmark Inc., also of Pittsburgh.

Fitch Ratings downgraded West Penn to CCC on Oct. 25. Standard & Poor's rates the system B-minus.

"The Ca rating reflects the severity of the financial status of the system and our belief that there is a high likelihood of a restructuring or bankruptcy filing, with or without the closing of an agreement with Highmark," Moody's said in a report. "The rating also incorporates the likelihood of less than full recovery of the bonds in the event of bankruptcy and in the absence of an asset sale."

Highmark's insistence that West Penn file for bankruptcy before closing on the sale triggered West Penn's termination of the agreement. Allegheny County Judge Christine Ward's ruling last Friday that Highmark did not breach its agreement with West Penn effectively means that West Penn cannot entertain offers from other suitors.

"We believe this ruling is a negative credit development for [West Penn] because it prevents [West Penn] from seeking other capital partners," said Moody's.

According to the rating agency, the exchange of lawsuits between the two organizations and a longer-than-anticipated approval process involving the Pennsylvania Insurance Department has complicated the closing of the transaction.

Also complicating matters was the change of chief executives at Highmark. William Winkenwerder replaced Kenneth Melani in April, one week before an Insurance Department hearing on the agreement, after Melani got into a public fistfight with his girlfriend's husband.

West Penn, one of the largest issuers in the municipal marketplace, emerged from the demise of the Allegheny Health, Education and Research Foundation, which filed a $1.3 billion bankruptcy in 1998.

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