Highmark said it reached an agreement to buy out bondholders of the financially distressed West Penn Allegheny Health System for 87.5 cents on the dollar. The insurer and health system have also renegotiated their acquisition deal.

Highmark, an insurer seeking to acquire West Penn Allegheny, reached the agreement in talks with five major bondholders for $726 million of the health system's outstanding debt, a notice to investors said (PDF). Both are based in Pittsburgh. The insurer and health system are also finishing negotiations to amend their acquisition agreement, which will be submitted to the state insurance regulators.

Highmark's spokesman declined to comment, but in a news release officials said the deal would avoid the courts, cut West Penn Allegheny's debt and strengthen the system's balance sheet.

Officials are in talks over final terms, which would require approval from bondholders with at least 73.5% of the outstanding bonds, a notice filed with investors said (PDF).

Highmark's acquisition has been closely watched nationally as one of a growing number of deals among insurers, medical groups and hospitals.

West Penn Allegheny agreed to an acquisition by Highmark in 2011 as the system struggled with ongoing operating losses and significant debt. The insurer immediately invested $50 million in the system and quickly followed with another $150 million in grants and loans, but the deal has yet to win approval from state insurance officials. West Penn Allegheny unsuccessfully tried to break off of the acquisition last fall in a dispute over a possible bankruptcy filing.

Meanwhile, West Penn Allegheny's finances have continued to deteriorate. The system lost $112.5 million on $1.6 billion in revenue for the year that ended last June, unaudited financial statements show, and operating losses for the first three months of this fiscal year increased from the same three months a year ago.

Matt Fabian, a managing director for Municipal Market Advisors, said Highmark's offer of 87.5 cents per dollar might be enough to entice bondholders with “large and uncomfortable” amounts invested in West Penn Allegheny. He said the deal will likely minimize any impact for other healthcare borrowers in the municipal market.

The health system borrowed $752 million in June 2007, at the tail of the credit bubble that fueled easy access to cheap debt and ended with the Great Recession.