West Penn Allegheny Health System has bought more time to refinance about $450 million in debt, the last and perhaps trickiest step in the takeover of the four Pittsburgh-area hospitals that once belonged to bankrupt Allegheny Health, Education and Research Foundation.
Pittsburgh-based Western Pennsylvania Health System created WPAHS by taking legal control of the four AHERF hospitals last August under an interim management agreement approved by U.S. Bankruptcy Court Judge Bruce McCullough.
But the deal won't be truly done until the new system assumes legal responsibility for about $426 million in AHERF long-term debt and refinances it by selling new bonds to replace the old bonds. WPAHS will also refinance a small amount of debt carried by the former Western Pennsylvania Health System.
Under Internal Revenue Service rules governing acquisition financing, WPAHS had been working to restructure the debt to meet a six-month deadline, which expired at the end of last month.
"That was really aggressive," said Jerry Fedele, general counsel for WPAHS. He said last week that refinancing will most likely happen in March, based on a favorable reinterpretation of the tax code that allows the system to take more time.
The welcome breather gives executives more flexibility to nail down financial details. Fedele said a postponement became possible when outside bond counsel determined recently that legal incorporation of the new system under a single parent, which is planned for March, could trigger the acquisition-financing rule.
The game of financial beat-the-clock got rolling last August when Western Pennsylvania Health System took over management of the four solvent AHERF hospitals, including 552-bed Allegheny General Hospital.
The key for the future is new, longer-term bonds to reduce debt costs in the near term and smooth cash flow over the longer haul.
The refinancing delay is not particularly unusual, though the details of the AHERF bankruptcy and subsequent sale of its assets are surely unique.
"People typically underestimate the difficulty of moving transactions and restructurings to their conclusion," said Keith Korenchuk, co-director of the national healthcare law practice of Davis Wright Tremaine in Charlotte, N.C.
Even with the slight respite, WPAHS has plenty of work to do to complete the financial makeover. Any day now Fedele expects bond-rating agencies to issue opinions on the new bonds. After that, system executives will hit the road to woo potential investors.
The closing on the bond issue is slated for the second half of March, Fedele said, and that would mark the last chapter in the financial bailout of the AHERF hospitals in Pittsburgh.