Fitch Affs McLaren Health Care -Michigan- Bnds At 'AA-'; Outlook Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 10, 2002

Fitch Ratings has affirmed the 'AA-' rating on $83.6 million Michigan State Hospital Authority revenue and refunding bonds (McLaren Health Care Corporation), series 1998A and $97.4 million revenue and refunding bonds (McLaren Obligated Group), series 1993A. The Rating Outlook is Stable.

McLaren Health Care Corporation's (MHCC) 'AA-' rating is primarily supported by its turnaround in operations following a nurses' strike, strong debt service coverage, moderately low debt burden, and successful integration of Bay Regional Medical Center (BRMC). Starting in November 2000, a 76-day nurses' strike at McLaren Regional Medical Center (MRMC) led to declining admissions and increased labor costs associated with the use of costly agency staff. In fiscal 2001, MHCC's operating margin declined to negative 1.6% ($9.4 million loss from operations), but has improved to 1.8% through eleven months ended Aug. 31, 2002. This return to previous operating profitability was driven by a reduction of agency staffing and positive utilization trends following the strike. As a result, MHCC's maximum annual debt service (MADS) coverage, which has averaged 3.8 times (x) from 1998-2001, was strong at 5.0x through ten months ended July 31, 2002. At July 31, 2002, MHCC's debt burden remained moderately low with 3.2x debt to EBITDA and 2.0% MADS as a percent of revenue. In December 2001, MHCC acquired BRMC, which posted an operating loss of $10 million in 2001. As a result of MHCC's integration strategy, BRMC posted a $7.5 million gain from operations through eleven months ended Aug. 31, 2002.

Credit concerns include declining liquidity relative to expenses, rising labor costs, and losses on employed physicians. At Aug. 31, 2002, MHCC had 108 days cash on hand, a substantial decline from 152 days at fiscal year-end 2000. Rising labor costs are largely due to a three-year post-strike nursing contract, which includes 5-6% annual wage increases. Approximately 40% of registered nurses at MHCC are part of a labor union. MHCC employs approximately 140 physicians at McLaren Medical Management, Inc. (MMMI), which had an aggregate net loss of $9.3 million through eleven months ended Aug. 30, 2002. While the number of employed physicians has remained relatively flat over the last four years, the net loss at MMMI has declined slightly from $11.4 million in fiscal 2000.

Fitch believes that MHCC will improve its liquidity position relative to expenses over the medium term as capital expenditures will be limited. Management is budgeting a 2.6% operating margin for 2003, and plans to rebuild liquid reserves in attaining 140 days cash on hand by 2005. Fitch believes that these goals are attainable. Disclosure to Fitch has been adequate in terms of completeness. MHCC has covenanted to provide annual disclosure to bondholders, which was standard during the Series 1998 financing. However, Fitch believes that quarterly disclosure is appropriate. Management has told Fitch that it is supplying bondholders with quarterly disclosure upon request.

Headquartered in Flint, Michigan, MHCC is a large, integrated, multi-hospital system with a total of 1207 staffed beds (1477 licensed) at six hospitals located in the cities of Flint, Lapeer, Lansing, and Bay City.