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Announcement:

Moody's affirms West Penn Allegheny Health System's (PA) Caa1 bond rating; Outlook remains negative

Global Credit Research - 15 Jun 2012

Action affects $737 million of outstanding debt

New York, June 15, 2012 -- Moody's Investors Service has affirmed West Penn Allegheny Health System's (WPAHS) (PA) Caa1 bond rating, affecting $737 million of Series 2007 fixed rate bonds issued through the Allegheny County Hospital Development Authority. The outlook remains negative.

SUMMARY RATING RATIONALE

The Caa1 rating reflects the severity of the financial status of the system and our belief that, without the financial support of Highmark (Baa2/negative), the system would have been forced to restructure within the last year, which without such support, may have resulted in a bond payment default as Moody's has seen in other similar circumstances. While a new affiliation agreement with Highmark has provided significant cash to WPAHS to remain viable, the affiliation is expected to close in fall 2012 and, therefore, we are only partly incorporating the benefit of the Highmark affiliation at this time. Highmark has committed a total of $400 million in unrestricted payments or loans to WPAHS over a period starting June 2011 to April 2014 and $75 million in financial support for medical education. While Highmark has not currently committed more funding beyond $475 million, we believe WPAHS will need more capital and/or operating support over the next two years and our current rating incorporates our belief that Highmark will be willing and motivated to provide further support.

Through nine months of fiscal year 2012 (ended March 31, 2012), the system reported a large operating loss of $88 million, exceeding the full fiscal year 2011 operating loss of $75 million (excluding approximately $23 million in a non-recurring positive item included in operating revenue). Year-to-date discharges were down 8%; including observation cases, inpatient volumes were down 5%, due to the reduction of services at West Penn Hospital. Unrestricted cash (excluding project funds) as of March 31, 2012 was $203 million, down $38 million since fiscal yearend 2011, even though the system received $100 million of payments from Highmark during this period. The system's overall strategy in the affiliation with Highmark has changed from one of downsizing to targeted expansion, which creates a high degree of uncertainty and execution and financial risks. Quarterly performance indicates a reduction in the operating loss between the second and third quarter but losses are still high and a fiscal year 2013 budget was not provided for Moody's to evaluate.

CHALLENGES

*Uncertainty related to the viability of a new strategy to expand rather than downsize; risks relate to reversing the strategy to regain volumes and investing in recruiting physicians while reducing financial losses

*Very large operating loss through nine months of fiscal year 2012 of $88 million, exceeding the fiscal year 2011 operating loss of $75 million (excluding a large non-recurring positive item); revenue declined 1% in the interim period, which includes eight months of West Penn Hospital's reduced services.

*Continued decline in acute discharges of 8% through nine months of fiscal year 2012 (5% including observation cases), largely due to the closure and downsizing of services at West Penn Hospital and inability to retain some volumes within the system

*Weak unrestricted cash position of 45 days of cash on hand as of March 31, 2012 (excluding trustee-held project funds), which represented a $38 million decline from fiscal yearend 2011; Highmark has provided $100 million in payments since fiscal yearend 2011 through March and another $50 million in April 2012; without further support from Highmark, we expect cash to continue to decline at a fairly rapid rate until operating losses are stemmed

*As of fiscal yearend 2011, underfunded status of pension plan was large at almost $200 million, even though decreasing from $300 million at fiscal yearend 2010; the system made its required pension payments in fiscal year 2011 and 2012.

*Heavy competition from UPMC Health System (Aa3/positive), which is the largest health system in the region and owns a large managed care plan, enabling UPMC to influence health plan membership and volumes; UPMC will be opening a new hospital to compete with WPAHS's Forbes Hospital

*High leverage relative to operating performance with 54% debt-to-operating revenues; peak debt service coverage is zero based upon Moody's methodology of annualizing nine-month results.

*Challenging demographic service area with declining population trends in the primary service area and an aging patient base

STRENGTHS

*Affiliation agreement with Highmark, executed October 31, 2011, which provides significant financial support to the system as noted above

*Favorable debt structure with all fixed rate debt and no interest rate derivatives

*System's prominence as the second largest healthcare system in Pittsburgh with 56,000 acute discharges (nine months annualized)

Outlook

Maintenance of the negative outlook reflects the substantial execution and financial risks as the system reverses strategy, and a weak operating performance and cash position that leave little flexibility to absorb any unexpected challenges, such as continued volume declines.

WHAT COULD MAKE THE RATING GO UP

With a negative outlook, a rating upgrade in the near-term is not likely. Long-term, an upgrade would be considered with significant and sustained improvement in operating cash flow for several years, at least stability in volumes, significant growth in unrestricted cash, stability or growth in medical staff and closing of the Highmark affiliation.

WHAT COULD MAKE THE RATING GO DOWN

Decline in unrestricted cash (excluding project funds), continued large operating losses and volume declines; failure to close the Highmark affiliation

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Lisa Martin
Senior Vice President
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Goldstein
Associate Managing Director
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms West Penn Allegheny Health System's (PA) Caa1 bond rating; Outlook remains negative
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