Analysis: Is Highmark offer to WPAHS enough? [Pittsburgh Post-Gazette]
By Bill Toland, Pittsburgh Post-Gazette | |
McClatchy-Tribune Information Services |
Consumers will learn more this week when Highmark is scheduled to again amend the official application regarding its proposed takeover of West Penn Allegheny. The application -- called a "Form A" -- should be released by the state
The amended application will reflect the details of last week's announcement that Highmark will be absorbing the outstanding balance on West Penn Allegheny's 2007A bonds -- a balance that Highmark did not provide but that is estimated at
Highmark has offered to pay the holders of those bonds
The insurer itself had earlier proposed a payoff to bondholders of
When the details of the deal came out, some were surprised.
"Frankly, I was shocked. You're thinking at least south of
Bondholders were less shocked, partly because most hospital systems that are ailing to the degree that WPAHS is don't have a
And if the health system had filed for bankruptcy -- even if the debt restructuring in that process would have paid the bondholders a less-than-optimal amount -- bondholders are first in line to be repaid since they are secured creditors. Money from asset liquidation, cash on hand, etc. could have been bound for the bondholders in some shape or form.
Also strengthening the bondholders' negotiating position was that an unknown buyer could have made a play for WPAHS's assets, perhaps making the bondholders whole and certainly making
A new buyer would surely want WPAHS's hospitals and doctors to be paid better than they are now -- reimbursements comparable to what Highmark is now paying the UPMC system.
In other words, Highmark had plenty of reason to keep WPAHS from ever reaching the open market and the bondholders had almost no reason to settle for a steep discount.
Thus the recovery for bondholders was higher than first projected and the savings for Highmark -- which agreed to cover West Penn Allegheny's junk bond debts as part of the 2011 purchase agreement between the two health organizations -- was lower than the insurer initially hoped.
Still, the only opinion on the debt restructuring that truly matters is that of the state
Previously, the
When Highmark presented its proposed debt reduction deal two weeks ago,
On one hand, it can be argued the debt discount isn't enough. On the other, it can be argued no discount is enough -- because, as many analysts have pointed out, debt load wasn't and isn't WPAHS's primary problem.
In testimony given during last year's WPAHS-Highmark divorce case, former Highmark CEO
The debt, he said, "wasn't the biggest thing ... Without [patient] volume, [WPAHS] wasn't going to survive, regardless of what we did about debt."
Analysts reiterated that view last week.
West Penn Allegheny has major challenges beyond annual debt service levels, said
So if the debt savings are mostly cosmetic -- amounting to just a few million dollars a year, as it turns out -- why did Highmark, WPAHS and bondholders spend the past few months wrestling over the issue?
Because without that savings, the deal might not have happened at all. If these dollars are indeed the key to getting state approval of the deal, the wrestling was worth it.
"Everybody wins," said
It's also a good time to borrow. With borrowing so much cheaper today than in 2007 -- most of the 2007 West Penn refinancing was borrowed at about 5.375 percent, while debt today costs half of that -- Highmark could actually borrow more than the
Bonds from that 2007 series with a 2040 maturity date purchased on
While the details of the debt restructuring and forthcoming borrowing make good chatter for finance experts and muni-market observers, most people in
"What the market wants to see [is] OK, what's this integrated delivery system going to look like? What does it mean to me in terms of benefits and cost?"
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