Highmark, WPAHS near deal to reduce and pay debt

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A proposed debt-reduction deal between West Penn Allegheny Health System, insurer Highmark Inc. and WPAHS's major bondholders that would pay those bondholders nearly 90 cents on every dollar of debt could be finalized within the next week or two.

The deal would reduce the roughly $726 million owed to bondholders to between $620 million and $630 million, and would allow the financially ailing health system to avoid -- at least for the moment -- bankruptcy reorganization.

One source put the bondholder haircut at just 12.5 percent, meaning Highmark and WPAHS had agreed to pay 87.5 cents on the dollar. A second source said the payout was less than 90 cents but slightly more than 87.5 cents.

That's a savings to WPAHS and Highmark of $100 million or less, which is below the savings that would have resulted from the 45-cents-on-the-dollar reduction request that Highmark had previously pitched to WPAHS, and less than some financial analysts had previously speculated.

An October analysis published by Bank of America Merrill Lynch said, for example, that a "typical" distressed system might be expected to restructure to the tune of 75 cents on the dollar, but that a system bleeding as much money as WPAHS has been might be able to pay as little as 38 cents on the dollar.

In other words, according to a source close to the banks, the bondholders are very "happy" with the deal. The sources requested anonymity because of the sensitivity of the talks and because they are not authorized to speak publicly about the deal -- and because a deal this size could still fall apart.

One source with knowledge of the negotiations said that, after the proposed deal is drawn up and signed by all parties, it would be taken to the state Department of Insurance for approval, a process that could take 60 days.

The debt-reduction deal could be the linchpin that allows the Insurance Department to finally endorse the larger deal that hangs in the balance -- Highmark's proposed takeover of West Penn Allegheny, which is the key to the insurer's envisioned in-house provider health network. That takeover process has taken more than a year, and WPAHS's finances have deteriorated in the intervening period.

Details of the debt deal emerged as Fitch Ratings on Friday downgraded the health system's bond rating to C, indicating an "exceptionally high credit risk," even as Highmark and West Penn Allegheny work to complete the debt restructuring.

Fitch previously had rated the outstanding $726 million balance of WPAHS's series 2007A revenue bond debt at CCC, which the ratings agency defines as "substantial credit risk."

The rating leaves the system one step above default on the debt. The original 2007 offering was about $752 million.

Sources with knowledge of the proposed deal and the high-stakes talks that have taken place over the last week in New York and Harrisburg characterized the deal as tenuous, and said the final cents-on-the-dollar figure could change. Each of the major bondholders, seven banking heavyweights in all owning about 80 percent of the debt, would have to sign off on the reduced recovery.

Last week, those same bondholders issued a "notice of default," which came after WPAHS failed to meet a deadline to release audited financial results for that year. The notice gave the health system 30 days to release its results; otherwise, bondholders could demand immediate payment of debt, which likely would have prompted a bankruptcy filing.

Still unclear is the corporate vehicle for rewriting, then paying off, that debt series.

With WPAHS in no position to refinance -- and with Highmark having agreed to cover West Penn Allegheny's bond debts as part of its 2011 purchase agreement -- it's possible that Highmark or its new corporate parent company will end up being the entity that takes out the loan to pay off the debt.

Working in Highmark's favor, from a borrowing standpoint, is a low-interest-rate environment, which makes it cheaper to buy debt.

On Friday, West Penn Allegheny spokeswoman Kelly Sorice called reports of the deal "speculative," adding that the region's second-largest hospital network "remain[s] in talks with Highmark and our bondholders."

The bondholder deal, if it is signed next week, still does not address WPAHS's other liabilities, including $280 million in unfunded pension liability and some $100 million in Highmark loans.

In its most recent financial update, issued in November, WPAHS posted a $28.3 million operating loss for the first quarter of its current fiscal year, putting it on track to lose more than $100 million for the year.

businessnews

Bill Toland: btoland@post-gazette.com or 412-263-2625. Steve Twedt contributed to this report.


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