West Penn bond rating takes a hit
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Fitch Ratings downgraded West Penn Allegheny Health Systems' bond rating yesterday and Standard & Poor's cited "negative implications" in light of Monday's announcement that the health system had overestimated revenue by $73 million.
Fitch Ratings has downgraded West Penn Allegheny Health Systems' $758 million in outstanding series 2007A bonds from BB to BB- and gave the hospital system a negative outlook.
Standard & Poor's gave a BB rating to the Allegheny County Hospital Development Authority bonds issued for West Penn Allegheny on Creditwatch "with negative implications pending a meeting with management in September," according to a news release.
"After the meeting, we expect, at minimum, to revise the outlook to negative from stable; however, the rating could also be lowered as well."
West Penn Allegheny spokesman Tom Chakurda yesterday had no comment.
The move by the rating services came a day after West Penn Allegheny revealed it would take a $73 million write-off because it had overestimated expected revenue of its patient accounts. That will "significantly" lower West Penn Allegheny's previous profitability and debt service figures for the just-ended fiscal year, according to Fitch.
Fitch analyst Jeff Schaub said the decision to downgrade was based on the lower profitability, the debt service coverage and an erosion of the system's unrestricted cash and investments, from more than 80 day's worth in June 2007 to 55 days as of March 31.
Standard & Poor's analyst Cynthia Keller Macdonald estimated that West Penn Allegheny has only 36 days' cash on hand, which she termed "troubling."
Following conversations with West Penn Allegheny leaders on Monday, Mr. Schaub said he expects the cash on hand picture to improve.
"West Penn is not running out of cash, but it was enough that we think that BB- was an accurate assessment," he said.
"They have a viable business model in our opinion, but they don't have the financial flexibility right now."
Both services cited high turnover among West Penn Allegheny's top administrators the past year as adding uncertainty.
"While these management changes are not necessarily a negative rating factor, the rapidity of change and number of key management positions that have turned over at West Penn may prove to be disruptive," said the Standard & Poor's release.
"In addition, there are likely to be major strategic changes under new leadership, which we will need to evaluate and factor into our rating decision."
While characterizing the downward trends as "material," Mr Schaub said there was not cause for alarm.
"We fully expect them to continue to meet their financial obligations. We think they will have a sizable and continued presence in the Pittsburgh market" with about a 20 percent market share, Mr. Schaub said.
Fitch will be closely monitoring the situation at West Penn Allegheny for the next few months with Fitch analysts making site visits to the campuses.
WPAHS recorded a $12 million net profit through the first nine months of the 2007-08 fiscal year, aided by investment revenue. Without that investment revenue, the system would have seen a $14.7 million operating loss.
Investors quickly bought up the $758 million in bonds at 5.37 percent when they were offered in May 2007, which helped settle a 9.25 percent debt from 2000 that was needed to complete the merger of West Penn with Allegheny General and three suburban affiliate hospitals.
At the time, West Penn Allegheny had posted profits for its previous three fiscal years.
First Published July 30, 2008 12:00 am
