West Penn credit woes

De­fends per­for­mance de­spite ‘dis­ap­point­ing’ drop

Modern Healthcare - - The Week In Healthcare - Me­lanie Evans

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.

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