West Penn Allegheny Health System on Tuesday received its third rating agency downgrade in two months, when Standard & Poor’s lowered the system deeper into junk, four notches to CC from B-minus.

CC is its third-lowest rating.

The move affects $726 million of Series 2007A bonds that the Allegheny County Hospital Development Authority issued on behalf of the Pittsburgh-based system, making it one of the largest junk-level issuers in the municipal marketplace.

Standard & Poor’s had placed West Penn Allegheny on credit watch with negative implications on Sept. 28, when teetering West Penn called off a $475 million merger agreement with Blue Cross Blue Shield insurer Highmark, also of Pittsburgh, which wants West Penn to file for bankruptcy protection before the two organizations close any deal.

William Winkenwerder, who replaced Kenneth Melani as Highmark CEO last summer after Melani got into a public fistfight with his girlfriend’s husband, is pushing for the bankruptcy.

Since then, Moody’s Investors Service and Fitch Ratings also lowered their ratings of West Penn to Ca and CCC, respectively.

“We wouldn’t be double-C if we didn’t feel that bankruptcy is a very realistic possibility. “We wouldn’t be double-C is we didn’t feel that bankruptcy is a very realistic possibility. In order to avoid bankruptcy we believe another party would have to come in,” Standard & Poor’s managing director Martin Arrick said in an interview. The rating agency assigned a negative outlook based on the bankruptcy specter.

West Penn and Highmark resumed discussions after an Allegheny County, Pa., court ruled that West Penn could not talk with other suitors. Still, “there remains significant uncertainty as to whether the parties will reach an agreement that will receive subsequent approval by the Pennsylvania Insurance Department,” Standard & Poor’s credit analyst Cynthia Keller said in a statement.

“If we go back a year and a half, you’d say, ‘Here’s the deal,’ and West Penn would have become a subsidiary of Highmark. The terms were fairly clear. Bankruptcy wasn’t discussed at the time. Now it’s on the table, and that begs the question: Can they get the deal done?,” said Arrick. “There have been a lot of changes, including a change of management at Highmark. We’re more concerned and less optimistic about the ability to get the deal done.”

Standard & Poor’s also considered West Penn’s extremely low unrestricted cash and investment balances as of Sept. 30. The system last week reported a $24.7 million loss for the first quarter of fiscal 2013 -- the three months ended Sept. 30 -- and also acknowledged it received a Wells notice from Securities and Exchange Commission enforcement staff.

A Wells notice means staff may recommend that the full commission bring a civil lawsuit or administrative proceeding against West Penn.

In addition, the rating agency added that the affiliation agreement, in which Highmark has already infused West Penn with $200 million, and the February reopening of the Western Pennsylvania Hospital in Pittsburgh has done little to stop the bleeding.

Standard & Poor’s also cited steady volume declines over the past five years.

“You have broad market demographics. There is not a lot of population growth in the market,” said Arrick. “Basically you have two large systems competing against each other at a time when overall business volume and inpatient admissions are going down.”

Highmark sees the deal as essential to competing in the region against the dominant University of Pittsburgh Medical Center.

A bankruptcy, debt restructuring or missed payment would push West Penn’s rating even lower, the report said, while closing a deal with Highmark with no disruption in debt-service payments, combined with evidence of “tangible financial and operating benefits from the affiliation” could result in a higher rating.

A West Penn official declined to comment.

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