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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The risk that banks represent to healthcare borrowers since the credit crisis is by now familiar. Hospitals that enter debt markets with bank credit backing can find investors wary or uninterested when banks' own credit strength falters. That can drive up interest rates or force borrowers to rapidly buy back or refinance debt.
So it should come as no surprise that the downgrade of 15 banks by Moody's Investors Service last week would create uncertainty for some healthcare borrowers. Moody's included Bank of America, Citibank, Morgan Stanley Bank and the Royal Bank of Scotland on the list and dropped the banks' short-term credit rating to P2 from P1.
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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.
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Fairview Health Services saw its credit rating from Moody's Investors Service drop one notch, and analysts said the outlook for the system is negative, in part because of the exit of its chief executive officer and turmoil over the health system's contracts with Accretive Health.
Moody's lowered Fairview's credit to an A3, a relatively strong rating, from A2. The Minneapolis-based system, which includes seven hospitals, saw its operating margin for 2011 (0.5%) squeezed by a new children's hospital and information technology installation, the rating agency said. Cash reserves declined last year. And its debt portfolio includes swaps that have strained finances across the sector since the credit crisis.
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