Moody's Investors Service revised its outlook for West Penn Allegheny Health System bonds to developing from negative while affirming its deep-into-junk-level Ca rating, as the teetering provider navigates through its affiliation agreement with Highmark Inc.

The move affects about $752 million of Series 2007 fixed-rate bonds that West Penn issued through the Allegheny County Hospital Development Authority. It was one of the largest speculative-grade new issues in the municipal marketplace, though ratings have gone even lower amid West Penn's continuing struggles.

"The developing outlook reflects the possibility of a rating upgrade or downgrade, depending on the outcome of the announced tender process and magnitude of the loss relative to the original par value of the bonds," Moody's said in a statement Monday night.

Blue Cross Blue Shield insurer Highmark and West Penn, both of Pittsburgh, ended several months of on-again, off-again bickering and litigation when they announced their agreement on Jan. 22. It called for Highmark to purchase West Penn's debt at 87.5 cents on the dollar, or about $658 million.

The Pennsylvania Department of Insurance must approve the deal, which the organizations hope to complete by April 30.

But Deputy Insurance Commissioner Stephen Johnson said in a regulatory filing that the total cost of the transaction, based on amended filings, has spiked from $475 million, initially announced in November 2011, to at least $1.6 billion including debt.

"Moreover, payment of the $1.6 billion does not include any funds for West Penn's pension obligations," Johnson wrote in a regulatory filing.

According to Moody's, West Penn's pension plan was underfunded by $279 million at the end of fiscal 2012, up $82 million from the previous year.

Johnson also said Highmark's evolving integrated delivery network strategy has "increased the complexity of the transaction." He cited additional expenditures of $525 million related to Highmark's implementation of a broader network, including an affiliation with Jefferson Regional Medical Center.

Highmark is looking to expand in western Pennsylvania to compete against the dominant University of Pittsburgh Medical Center. West Penn is Pittsburgh's second-largest health care system with 56,000 acute discharges.

Moody's said it would determine after the deal closes whether a default exists.

According to Moody's, a loss to bondholders of less than 35% of par value could trigger a rating increase. A loss of more than 65% could generate a downgrade, the rating agency added.

"The Ca rating reflects the severity of the financial status of the system and execution risks related to completing the tender," Moody's said. West Penn reported a $113 million loss for fiscal 2012 and $75 million in fiscal 2011.

Highmark and West Penn initially announced an agreement in November 2011. Since then, Highmark has infused about $232 million in grants and other advances, including loans.

West Penn called off the deal on Sept. 30 after Highmark insisted the health system file for bankruptcy protection, but talks resumed two months later after an Allegheny County court prohibited West Penn from talking with other suitors.

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