Analysis: West Penn Allegheny can't keep Highmark's $200M

An affiliation agreement between West Penn Allegheny Health System and Highmark Inc. does not support the health system's allegation that the insurer breached their deal and that West Penn can keep $200 million from Highmark, an independent analysis found.

“A material inaccuracy or breach of a representation or warranty made by either party is cause for termination, but the performance of activities that one side does not like is not listed as such,” said the credit commentary published Oct. 12 for bondholders and investors.

The analysis by Bank of America Merrill Lynch, the corporate and investment banking division of Bank of America, suggests the deal might be “too expensive” for the state's largest insurer.

The health system's board of directors halted Highmark's proposed $475 million acquisition last month because it claims top Highmark officials demanded that West Penn Allegheny file for bankruptcy as a means of relieving nearly $1 billion in pension and other debts.

The bank's analysis disputes West Penn Allegheny's contention that a bankruptcy request releases it from obligations and allows the health system to keep $200 million in loans and grants if the affiliation agreement falls through. Highmark has filed a lawsuit seeking a temporary injunction, the breach issue, and a hearing is set for Oct. 25-26.

West Penn Allegheny, in a response to the lawsuit released on Tuesday, stated: “Whether unhappy with the terms it struck in October 2011 or perhaps influenced by its recently extended contract with UPMC, one thing is clear — Highmark has no intention to honor its obligations under the Affiliation Agreement. Instead, it plans to hold West Penn Allegheny hostage under the Affiliation Agreement's negative covenants and force the System to deplete its cash reserves until either it agrees to the terms of a modified transaction as mandated by Highmark or it has no choice but to declare bankruptcy.”

The bank analysis said regardless of what West Penn Allegheny does, the health system's $721 million bond debt “will be restructured, either in or out of bankruptcy court.”

Bank of America said Highmark's $475 million subsidy to the struggling hospital network could prove “too little,” given its weakened operations. West Penn Allegheny posted an $87.7 million operating loss through the nine months of its fiscal year that ended June 30.

“We respectfully disagree with Bank of America's conclusions, particularly those surrounding Highmark's breach,” West Penn Allegheny spokeswoman Kelly Sorice told the Tribune-Review.

Sorice said Highmark officials told health system officials the insurer would not close on the transaction, even if the Pennsylvania Insurance Department approved it.

“Bank of America's discussion of the breach unfortunately does not take this vital fact into consideration,” Sorice said. She said the board “stands behind its actions to preserve our legal rights and welcomes the opportunity to talk with Highmark, at their earliest possible convenience, to discuss alternatives to bankruptcy.”

West Penn Allegheny's response said the insurer as recently as last week conveyed an offer “that gave Highmark the ability to walk away from a transaction if West Penn Allegheny's creditors do not agree to reduce their debt to a level satisfactory to Highmark.”

Highmark officials deny they breached the contract and have publicly said they are committed to completing the deal.

In a memo, West Penn Allegheny officials assured the system's 11,000-plus workforce their pensions would be protected if the system filed for bankruptcy. If the federal Pension Benefit Guaranty Corporation took over the retirement plan, officials said, most employees “would receive their full accrued benefit payable in an annuity.”

Bank of America said another suitor might rescue West Penn Allegheny, but noted the system's financial difficulties make that a less likely scenario.

“We cannot imagine that any suitor would offer more than a very distressed hospital price for West Penn,” the report said. “In our opinion, Highmark could make a successful new bid for WPAHS at or below the current market price.”

Luis Fábregas and Alex Nixon are staff writers for Trib Total Media. Fábregas can be reached at 412-320-7998 or lfabregas@tribweb.com. Nixon can be reached at 412-320-7928 or anixon@tribweb.com.