Standard & Poor's Ratings Services said it lowered its rating to CC from B-minus on $726 million series 2007A bonds issued for West Penn Allegheny Health System by the Allegheny County Hospital Development Authority, Pa. and removed it from CreditWatch where it had been placed with negative implications on Sept. 28.
"The lower rating reflects our opinion of Highmark Inc.'s desire to have WPAHS declare bankruptcy or otherwise restructure its debt and pension obligations prior to any affiliation and the breakdown of the affiliation discussions after WPAHS notified Highmark that it was in breach of the agreement," said Standard & Poor's credit analyst Cynthia Keller. "Although talks have resumed after a legal ruling prohibited WPAHS from seeking other suitors, there remains significant uncertainty as to whether the parties will reach an agreement that will receive subsequent approval by the Pennsylvania Insurance Department," said Keller.
Other rating factors considered by Standard & Poor's include WPAHS': extremely low unrestricted cash and investment balances as of Sept. 30, 2012; continued weak financial performance; insufficient financial and operating benefits from the affiliation agreement and the February reopening of The Western Pennsylvania Hospital (WPH) to reduce the operating losses, which have been stable to slightly increasing for the past three quarters; steady volume declines over the past five year, which continue through the first quarter of 2013; continued presence of interim management although WPAHS has extended the current management contact; and receipt of a Wells notice from the Securities and Exchange Commission with potential future financial penalties.
The negative outlook reflects Standard & Poor's view of the possibility of a bankruptcy filing or debt restructuring given WPAHS's thin financial profile and ongoing losses.
Standard & Poor's would assign a lower rating if WPAHS files bankruptcy, restructures its debt, or misses principal or interest payments. A higher rating within the one-year term of the outlook period could be possible if WPAHS consummates its affiliation agreement with Highmark (A/stable) with no disruption in debt service payments and there is evidence of tangible financial and operating benefits from the affiliation.
WPAHS operates five acute-care hospitals in and around Pittsburgh.