Fitch Ratings knocked West Penn Allegheny Health System's credit rating to C and said analysts believe “negotiated debt restructuring appears to be inevitable to forestall insolvency.”

The C rating is the lowest Fitch rating that does not indicate a default. West Penn Allegheny, the financially troubled Pittsburgh health system in talks to be acquired by the insurer Highmark, was previously rated CCC by Fitch.

The acquisition has been closely watched nationally as one of several deals by insurers to expand their reach in healthcare delivery. West Penn Allegheny's financial distress could also garner significant attention should talks with bondholders fail and should the health system default on payment to bondholders, said David Cyganowski, managing director with healthcare financial advisers Kaufman Hall.

Investors may hesitate to buy lower-rated healthcare bonds should such a prominent health system with such sizable debt default, he said, which could increase borrowing cost and limit access for lower-rated healthcare borrowers.

“Nobody benefits if there's a default at West Penn,” Cyganowski said. “There is no winner in a default. Everybody loses.”

Information from West Penn Allegheny has been scant. The health system failed to release audited financial statements for the year ended last June, which prompted a notice of default Jan. 3 that the health system has 30 days to fix, Fitch Ratings said as it announced the downgrade. The health system has also entered into a nondisclosure agreement with lenders.

Unaudited financials (PDF), released in October, show operating losses nearly doubled to $112.5 million on revenue of $1.6 billion.

Kelly Sorice, a West Penn spokeswoman, declined to comment on the rating action. “We are continuing constructive talks with Highmark and our bondholders,” she said in an e-mail.

The rating action affects bonds totaling $726 million. The system reported $878.8 million in long-term debt on its balance sheet for last year, the unaudited financials show.

The deal with Highmark—the Pittsburgh insurer that has poured more than $200 million in cash into West Penn Allegheny since its 2011 agreement to acquire the system—has not yet closed, Fitch said.