Rating firm S&P downgrades West Penn Allegheny
Standard & Poor's Ratings Service downgraded the credit rating of West Penn Allegheny Health System on Tuesday, less than a week after the nearly bankrupt hospital operator disclosed a three-month loss and said it may face a lawsuit by the Securities and Exchange Commission.
S&P said it lowered the rating on the likelihood that the system would enter bankruptcy to reduce its $1 billion in bond debt and pension liability as part of an acquisition by Highmark Inc., the state's largest health insurance company.
“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,” analyst Cynthia Keller said.
“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,” Keller said.
West Penn Allegheny spokeswoman Kelly Sorice declined to comment on the downgrade.
Among problems faced by the five-hospital system that also contributed to the downgrade were continuing declines in patient volume, overall financial weakness and the SEC warning, S&P said. The rating dropped further into junk status to CC, from B-. At CC, the system's rating is only one step from the bottom of S&P's scale.
On Thursday, West Penn Allegheny said it lost $24.7 million in the July-September quarter. It also disclosed that the SEC had warned it that it may face a lawsuit over a 2009 misstatement of pension obligations.
The SEC began investigating the system in 2008 after it revealed that it had inflated revenue on financial statements by $73 million. The probe eventually turned up an allegation that West Penn Allegheny had low-balled a 2009 estimate of future pension obligations, according to a memo from board Chairman Jack Isherwood.
In the memo to system employees on Friday, Isherwood said the possible SEC lawsuit “does not relate to any ongoing activity or any past or present accounting practices.”
“On the contrary, the SEC has said it may bring action against WPAHS for disclosures made more than three years ago relating to our pension plan obligations,” he said.
The system intends to respond to the SEC as soon as possible, Sorice said, and argue that legal action is unnecessary.
Meanwhile, talks continue between leaders of West Penn Allegheny and Highmark to finalize the insurer's planned $475 million acquisition of Pittsburgh's second-largest health system, Highmark spokesman Aaron Billger said.
He declined to comment further on the talks or on the S&P downgrade.
Moody's Investors Service and Fitch Ratings also have downgraded West Penn Allegheny's credit rating since late October.
Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or firstname.lastname@example.org.