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West Penn Allegheny Health soars with Highmark deal

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By Bloomberg News
Thursday, May 9, 2013, 12:01 a.m.

Bond investors betting on the takeover of West Penn Allegheny Health System, whose 2007 tax-exempt junk deal is the biggest for a U.S. hospital in more than two decades, are benefiting from a four-year rally in such debt.

In the deal that steered West Penn away from bankruptcy, Highmark offered to buy the hospital system's bonds at 87.5 cents on the dollar. Bondholders sold it $604.2 million worth, or 85 percent.

Since the April 29 purchase, investors who held onto the obligations have seen prices rise as much as 14 percent, data compiled by Bloomberg show.

Some bondholders are wagering that the merger will bolster West Penn's finances, said Lyle Fitterer, a managing director at Wells Capital Management. Amid the longest rally in junk-grade hospital munis in six years, he kept nearly $7 million of West Penn debt maturing Nov. 15.

The acquisition and the purchases from the majority of bondholders “gave us comfort to just basically hang on to the bonds with the view that we would get paid par when they mature,” said Fitterer, who helps oversee about $31 billion of munis from Menomonee Falls, Wis.

West Penn, which admitted almost 56,000 patients in fiscal 2012, borrowed $752 million in 2007 to refinance debt. It was the largest tax-exempt hospital deal rated below investment grade, according to Bloomberg data starting in 1990.

Bondholders kept $105.5 million of the West Penn securities, with $70.2 million maturing in November 2040, Bloomberg data show. Bonds maturing Nov. 15 traded May 1 at 100 cents, 14 percent more than Highmark's tender price, Bloomberg data show. That's still down from the initial 2007 pricing level of 101.6 cents.

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