Highmark to pay off WPAHS debt in $726 million bond deal

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Highmark and West Penn Allegheny Health System officials have reached an agreement with bondholders on a debt-reduction deal.

Highmark has offered to purchase $726 million in outstanding series 2007A bonds issued for WPAHS for 87.5 cents on the dollar, resulting in a savings of about $100 million for Highmark. With the deal, officials said West Penn Allegheny will avoid a bankruptcy filing and preserve pensions for the health system's 12,000 employees.

The deal means Highmark will be paying off about $635 million of the WPAHS debt.

The agreement is considered crucial to Highmark's plans to acquire West Penn Allegheny, which the insurer plans to have as the crown jewel in a regional integrated health care delivery system it is putting together to compete with UPMC.

Without the deal with bondholders, efforts to gain approval from the Pennsylvania Insurance Department could have been in serious jeopardy. With an agreement in hand, Highmark will now file an amended application with the insurance department.

"Paramount to our affiliation with West Penn Allegheny is preserving provider competition and choice in health care providers for the entire community," said Highmark president and CEO William Winkenwerder Jr. in a release.

WPAHS board chairman Jack Isherwood added, "We believe our partnership will preserve this important community asset that provides high-quality, efficient health care for our patients."

In a mass email to the health system's employees Wednesday, Mr. Isherwood said the deal "was a terrific step, and it is very meaningful to the WPAHS community. However, further steps must be made before our affiliation with Highmark will be finalized," including a community benefits review by the Allegheny County Orphan's Court.

Nurse Cathy Stoddart, president of the SEIU labor unit at Allegheny General Hospital, was excited by the news of a deal.

"The most important thing is that this preserves quality health care competition in Pittsburgh," she said. But it is also clearly a relief for WPAHS employees to know their jobs and pensions are preserved, she added, and "we can count on going to work tomorrow."

SEIU's statewide health care division put out a release late Wednesday calling on the state insurance department "to approve the affiliation without further delay."

Highmark and WPAHS officials began negotiating a restructuring deal in November with five major bondholders who held 76 percent of the bonds, according to a DAC Bond filing Wednesday. While the discussions continued, bondholders agreed not to trade their bonds for 60 days, a deadline that was extended to Wednesday.

UMB Bank, trustee for the WPAHS bondholders, filed notice Tuesday that it was scheduling a bondholder call for Thursday morning in anticipation of Wednesday's announcement. Although terms of the deal will be discussed in the private call, a formal vote by bondholders is not expected for some time as legal documents are prepared. A source close to bondholders earlier told the Pittsburgh Post-Gazette that they were happy with the terms of the agreement.

Highmark and West Penn Allegheny agreed to affiliate Oct. 31, 2011, but the process has run into delays by events such as the abrupt departure of Highmark president and CEO Kenneth Melani in April, Highmark's acquisition of the Jefferson Regional Health System in June and then West Penn Allegheny's failed attempt last fall to seek other partners because officials believed Highmark was pushing the system to file for bankruptcy.

After Highmark went to court and successfully blocked West Penn Allegheny's move, the two have been in earnest negotiations to complete a deal that would include convincing bondholders to agree to reduce the value of their bonds.

West Penn Allegheny has been battling growing debt and decreasing revenues and patient volumes. In November, the health system reported a $28.3 million operating loss for the July-September first quarter of its fiscal year.

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Steve Twedt: stwedt@post-gazette.com or 412-263-1963.


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