Moody's Investors Service said it has downgraded West Penn Allegheny Health System, Pa.'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.

The rating is removed from review for possible downgrade, where it was placed on September 28, 2012, following the announcement of WPAHS's termination of its agreement with Highmark Inc. and Affiliates.

The Ca rating reflects the severity of the financial status of the system and Moody's belief that there is a high likelihood of a restructuring or bankruptcy filing, with or without the closing of an agreement with Highmark.

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.

The system's announcement in September to terminate the agreement with Highmark and subsequent lawsuits between WPAHS and Highmark, as well as a longer-than-anticipated process to receive approval from the Pennsylvania Insurance Department, has delayed and complicated the closing of the transaction.

The presiding judge of the Allegheny County Court of Common Pleas ruled last Friday that Highmark did not breach the agreement and granted Highmark's request for a preliminary injunction against WPAHS.

This ruling is a negative credit development for WPAHS because it prevents WPAHS from seeking other capital partners.

WPAHS's operating loss in fiscal year 2012 (based upon unaudited financial information) was very high at $113 million, exceeding the loss in fiscal year 2011.

WPAHS's weak unrestricted investment and cash position of $273 million as of June 30, 2012 effectively has been supported by payments from Highmark. WPAHS has received a total of approximately $232 million in grants, loans and other advances and capital support since 2011.

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