Highmark to buy Pittsburgh health system, cash to bondholders

Wed Jan 16, 2013 6:10pm EST

Jan 16 (Reuters) - Insurer Highmark Inc said on Wednesday that it reached a deal to acquire a troubled Pittsburgh health care system while offering bondholders cash payouts of 87.5 cents on the dollar.

The out-of-court restructuring agreement will cut West Penn Allegheny Health System's nearly $710 million of outstanding debt and inject cash into the system, likely averting a Chapter 11 bankruptcy filing, according to a statement by Highmark and a source familiar with the matter.

With interest, the cash tender offer amounts to about 90 percent.

Bondholders, West Penn and Highmark, one of the 10 biggest U.S. health insurers, are in the final negotiating stages. The agreement must still be approved by the Pennsylvania Insurance Department.

A major regional healthcare system, West Penn grew out of the remains of another healthcare system that went bankrupt in 1998.

All three major U.S. credit rating agencies have cut West Penn's credit rating deeper into junk territory since November, after its original $475 million merger alliance with Highmark fell apart and landed in court under the specter of a possible bankruptcy filing.

After a state judge blocked West Penn from seeking alternate suitors, the two sides resumed negotiations, along with bondholders.

"Paramount to our affiliation with West Penn Allegheny is preserving provider competition and choice in health care providers for the entire community," William Winkenwerder, president and chief executive of Highmark, said in a statement.

West Penn's long-time rival is University of Pittsburgh Medical Center, a more expensive provider.

"We believe our partnership will preserve this important community asset that provides high-quality, efficient health care for our patients," West Penn's board chairman, Jack Isherwood, said in a statement.

Some terms of the original agreement remain, a source said, including the creation of a Highmark holding entity to house the insurance company and the health facility owner separately, insulating the insurance arm from hospital liabilities.

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