The credit-rating deal breaker

West Penn Allegheny Health System, with help from insurer Highmark, saw its B+ credit upheld by Fitch Ratings. The New York rating agency, which downgraded the Pittsburgh health system in December, also changed its credit outlook to stable from evolving.

Fitch analysts said its rating depends on Highmark's plans to acquire West Penn Allegheny and the insurers' financial support for the struggling system. The health system's operating losses also shrank in the third quarter to $22.6 million from $32 million the prior three months, if you don't count additional losses from West Penn Allegheny's turnaround efforts, said Fitch.

But if the deal fails to close in a little less than a year, West Penn Allegheny would face “significant downward rating pressure,” Fitch said. Without more cash from Highmark, West Penn Allegheny would not be able to meet a rate covenant. In fact, the health system must use $50 million from Highmark to meet the covenant before its fiscal year ends on June 30.

The health system's “viability hinges on the successful execution of the affiliation with Highmark,” said Fitch analysts. “If the affiliation agreement is not finalized, a multi-notch negative rating is likely to occur.”

Last week, Moody's Investors Service also left West Penn Allegheny's credit rating unchanged, but analysts said it is likely that Highmark will need to invest more than initially proposed ($475 million, including medical education).

You can follow Melanie Evans on Twitter: @MHmevans.