Fitch Ratings lowered its already low rating for West Penn Allegheny Health System to CCC from B+, a multi-notch drop, as the chance of debt restricting grows and an acquisition by Highmark looks less certain.
The news came as the financially strapped health system and Highmark, a Pittsburgh insurer, went before a Pennsylvania judge for a hearing on West Penn Allegheny's recent bid to back out of its acquisition by Highmark in order to search for another buyer. The system announced the deal was off in late September and Highmark quickly sued to stop West Penn Allegheny from talking to new suitors.
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One major credit rating agency upgraded more not-for-profit hospitals and systems than it downgraded between July and September, and deals—mergers, acquisitions and leases—were behind better credit in several cases.
Moody's upgraded 12 not-for-profit healthcare borrowers with $3.2 billion in outstanding debt last quarter compared with the seven downgraded borrowers with $957.3 million of debt, Moody's said in a new report.
Indeed, deals have been so numerous and have so influenced credit that Moody's Investors Service now says it was wrong earlier this year when it said that 2012 would likely close with more downgrades than upgrades. The year may end with an equal number of each, the report said. “We're not prognosticators here,” said Moody's associate analyst Carrie Sheffield. “We do have a negative outlook for the sector” and analysts expected to see more downgrades than upgrades, she said.
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Later this week, Catholic Health Initiatives is expected to enter the taxable market to borrow $1.5 billion, joining a string of not-for-profit systems that have bypassed tax-exempt debt thanks to the flexibility and recent favorable rates found in taxable markets.
“Tax-exempt debt is a really terrific, low-cost financing vehicle, but it's a lot more difficult to accomplish because of the way the rules work,” said Linda MacDonald, vice president of treasury services for the Englewood, Colo.-based system. Taxable debt allows borrowers to move more quickly, she said.
Tax-exempt debt also has restrictions on how it can be used that don't exist for taxable debt. To be financed with tax-exempt bonds, acquisitions and other assets that require capital investments cannot be for-profit. Borrowers must limit the for-profit use of projects financed by tax-exempt bonds to 5% until the bond is paid off.
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The Mayo Clinic entered the taxable public debt market for the first time last week and borrowed $300 million at a cost comparable to tax-exempt bonds but with less hassle.
Rick Haeflinger, assistant treasurer and investment officer for the Rochester, Minn., health system, said the price in taxable markets was competitive with tax-exempt markets and direct placement debt, which has emerged as another alternative to the more regulated municipal bond markets.
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