West Penn credit woes
Defends performance despite ‘disappointing’ drop
West Penn Allegheny Health System, a struggling Pittsburgh provider that squeaked into bond markets before the credit crisis erupted, is describing yet another drop to its credit rating as “disappointing” and defending its turnaround efforts.
“Our operating performance continues to move in the right direction, despite declining inpatient volumes, which we anticipated and are impacting most providers in the industry,” West Penn Allegheny officials said in a written statement. Spokeswoman Kelly Sorice said in an e-mail the system had no further comment.
West Penn issued the bonds near the height of the credit boom in 2007 in what was the municipal bond market’s largest-ever speculative debt deal (Oct. 1, 2007, p. 36). So eager were investors that the system secured the highly favorable interest rate of 5.375% despite its weaker credit rating (See related story, above).
“We have adequate financial resources to meet our financial obligations and capital needs, and anticipate our financial position to improve as our operational restructuring plan gets further implemented,” according to the statement.
But Moody’s Investors Service, which lowered West Penn’s speculative credit rating to B2 on $748 million in outstanding bonds earlier this month, said the system’s weak operations leave little room for an unplanned upset to what analysts described as a risky turnaround with significant capital and operating costs.
System officials said the latest revision was “disappointing, especially following Fitch Ratings’ recent affirmation of its existing rating of our bonds in recognition of the progress made over the past year.” Fitch did not change its BB-rating for West Penn in January but did, however, say the system’s outlook was negative. Eva Thein, a senior director of Fitch, said analysts would meet with executives in March and would review the rating six months following its last report.
Standard & Poor’s also rates West Penn a BB-after a downgrade last June.
Moody’s analysts noted the plan to improve
West Penn’s operations—an effort to consolidate and shrink its Pittsburgh hospitals—is under way in a difficult economy. The system’s bid to restructure physician practices could jeopardize efforts to recruit and retain doctors, Moody’s said.
The system said it pledged $30.8 million over seven years in an agreement with Premier Medical Associates that will consolidate the two largest physician groups in Pittsburgh’s eastern suburbs, according to its financial statements. The system reported an operating loss for the year ended June 30 of $89.9 million after restructuring efforts led to a write-down of $70 million. Last year’s loss followed operating deficits in recent years (See chart).
Analysts said the system’s operations improved but fell significantly below expectations despite restructuring costs. Meanwhile, a recent drop in admissions accelerated and West Penn’s pension obligations grew.
Moody’s downgraded West Penn in June to B1 and the latest downgrade places the system solidly among borrowers “subject to high credit risk,” according to the rating agency. Fewer than 1% of hospitals and health systems among the 490 not-for-profit healthcare borrowers rated by Moody’s hold a B2 credit rating. Lisa Martin, senior vice president for Moody’s public finance group, said the ratings agency will monitor the system’s quarterly financial returns and take action if needed, as is the case for other borrowers with similar ratings.