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West Penn Allegheny bonds left behind by market rally

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By Bloomberg News
Tuesday, Nov. 20, 2012, 12:01 a.m.

The $100 billion market for high-yield municipal debt is rallying the most in three years despite the specter of the potential bankruptcy of the biggest tax-exempt junk issue since at least 1990.

West Penn Allegheny Health System, a five-hospital system in Pittsburgh with about $750 million of junk bonds, is struggling with deepening losses and falling revenue. There is “a high likelihood” the provider will seek bankruptcy protection or restructure its bonds, even as it discusses being acquired by Highmark Inc., one of the nation's 10 biggest health-insurance companies, Moody's Investors Service said last week.

Securities of West Penn have lost about 35 percent of their value since their sale in 2007, data compiled by Bloomberg show. Meanwhile, speculative-grade municipal bonds are earning the most since 2009. With tax-free interest rates at 45-year lows, the value of these high-yield bonds will extend continue to rise even if West Penn fails to repay investors in full, said Susan Courtney, a managing director at Prudential Fixed Income in Newark, N.J.

“Investors in the muni high-yield space are aware of what's going on with West Penn,” said Courtney, who helps manage $1.8 billion in tax-exempts, including West Penn bonds.

Gains in the $3.7 trillion municipal market accelerated in the past two weeks amid speculation that income-tax rates will rise as part of trimming the federal deficit. While municipals have earned 8.2 percent this year, high-yield has banked 17 percent, the most since 2009, according to Standard & Poor's. Debt backed by hospital and health-care revenue has earned about 11 percent.

Yet West Penn, which admitted almost 56,000 patients in fiscal 2012, has been left out of the rally.

Bonds due in 2040 traded at an average of 65.64 cents on the dollar on Monday, down from 101.8 cents when they were issued in May 2007, data compiled by Bloomberg show. The average yield on Monday's trade was 8.66 percent, compared with 5.15 percent at issue.

West Penn has made no determination on a bankruptcy filing, spokeswoman Kelly Sorice said.

Its offer was the largest tax-exempt junk deal since at least 1990, Bloomberg data show. Larger issues backed by tobacco revenue were sold with investment grades and are now rated as junk, said Daniel Solender, who helps manage about $17 billion of municipal bonds, including West Penn, at Lord Abbett & Co. in Jersey City.

West Penn had operating losses of $113 million and $75 million in the past two years, according to Moody's. The system has an unfunded pension liability of $279 million. It competes with UPMC, the region's largest health system.

West Penn was formed in 2000 to bring the five hospitals under one company after Allegheny General Hospital's parent, the Allegheny Health, Education and Research Foundation, filed for bankruptcy in 1998.

“This is a situation that's been difficult for a long time,” Solender said.

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