West Penn Allegheny Health System and health insurer Highmark, both based in Pittsburgh, have agreed to a deal in which Highmark would purchase the health system's debt at a discounted rate, thus avoiding bankruptcy.
Highmark will buy West Penn's $726 million in bonds, and bondholders will receive 87.5 cents on the dollar, according to the news release. Highmark will save roughly $91 million in the deal, meaning the health insurer will be paying off $635 million of West Penn's debt while bondholders absorb the losses.
However, the debt agreement will allow the two organizations to continue toward their proposed merger, which had teetered on the brink of collapse since late last year. Highmark and West Penn have been negotiating a merger for more than a year, and discussions hit a major snag in September when West Penn called off the affiliation. At the time, West Penn officials claimed the insurer breached their affiliation agreement by allegedly wanting to restructure the health system through bankruptcy.
William Winkenwerder Jr., MD, president and CEO of Highmark, said the deal was essential to "preserving provider competition and choice in healthcare providers for the entire community."
West Penn Board Chair Jack Isherwood said, "We are pleased that West Penn Allegheny, our bondholders and Highmark have reached this important milestone to help further our pending affiliation with Highmark. We believe our partnership will preserve this important community asset that provides high-quality, efficient healthcare for our patients."
Moody's Investors Service — which currently rates West Penn's bonds "Ca", its second-lowest rating — released a special report saying the debt restructuring "marks a rare event in the history of the municipal finance capital market." The deal comes almost 15 years after West Penn's related predecessor, Allegheny Health and Education Research Foundation, filed for bankruptcy in 1998.
Moody's analysts said in the report that West Penn still faces several financial hurdles, especially if it still intends to compete with local healthcare giant University of Pittsburgh Medical Center. West Penn has reported operating losses every year since 2001, with 2005 as an exception, and the beleaguered health system has consistently had less than 70 days cash on hand. West Penn also must grapple with its underfunded pension plan, which stood at $279 million as of the end of its 2012 fiscal year.
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