West Penn Allegheny Health System bond prices rising

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Credit analysts have mixed views on how the marriage of Pittsburgh insurer Highmark Inc. and West Penn Allegheny Health System will affect the companies' debt, but investors have made up their mind -- they like the deal, at least in the short term.

And they especially like the value on the outstanding junk bonds that were rescued when Highmark agreed in January to pay 87.5 cents on the dollar for WPAHS's 2007 debt series.

After Highmark formally offered on April 5 to buy the $710 million in outstanding debt, about 85 percent of the bonds were sold back to the insurer for $604 million. The proposed buyout was meant to bolster the tax-exempt refinancing debt that WPAHS borrowed in 2007, one of the biggest below-grade hospital bond deals in decades and originally worth $752 million.

The bonds that were cashed in were officially purchased on April 29, the day the state Insurance Department approved Highmark's purchase of WPAHS. The purchase, and the bond deal, kept the health system out of a probable bankruptcy.

But that left 15 percent of the bonds still outstanding. And investors who hung on rather than selling their bonds to Highmark have seen prices spike by as much as 14 percent in the last two weeks.

Bonds set to mature in 2017 that were purchased May 2 sold for 91.7 cents on the dollar, which is higher than the price Highmark was offering.

The short-term debt in particular is likely to see higher bidding prices, said Lyle J. Fitterer, managing director at Wells Capital Management. He held on to nearly $7 million of WPAHS debt set to mature Nov. 15.

"The long debt is much more speculative," he said.

But debt from the 2007 series that matures this year, as well as the debt that matures four years down the road, will both get a boost from the Highmark acquisition.

"At least for the next few years, there's a confidence that the [health] system is not going to be going away," he said, and there's hope that those who hang in there may see full par value.

The prices also may get a boost from the general confidence in hospital bonds, he said.

WPAHS is benefitting from a four-year rally in value-priced, high-yield hospital debt, according to Bloomberg News. Low-rated hospital debt has gained 3 percent this year, against 1.3 percent for the rest of the municipal market, which is stuck in neutral thanks to low interest and inflation rates, as well as the low risk levels on most municipal debt.

Of the debt that wasn't sold back to Highmark, about $11.5 million is tied up in bonds maturing this year, with $3.3 million in bonds maturing in 2017, $20.5 million in 2028, and $78 million after 2040.

The debtholder optimism comes as various credit agencies staked out different opinions on how the Highmark and WPAHS deal would affect the two companies' financial strength. Moody's Investors Service upgraded West Penn Allegheny Health System's bond rating last week, but downgraded Highmark.

Standard & Poor's Ratings Services downgraded WPAHS's 2007 bonds two levels, to its lowest rating, D.

Fitch Ratings said its C rating on the health system is "evolving," meaning it could go either way, up or down.

And insurance industry credit agency A.M. Best, on April 29, said the ratings of Highmark Inc. and its subsidiaries were unchanged following state approval of the acquisition.

businessnews - health

Bill Toland: btoland@post-gazette.com or 412-263-2625.


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