Fitch Rates McLaren Health Care Corp., Michigan, Bonds 'AA-'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns a rating of 'AA-' to the approximately $99.4 million Michigan State Hospital Authority indexed put bonds (McLaren Health Care Corporation), series 2005A. Fitch also affirms the 'AA-' rating on $78.7 million Michigan State Hospital Finance Authority revenue and refunding bonds (McLaren Health Care Corporation), series 1998A. The Rating Outlook is Stable.

There is a mandatory tender three years after the series 2005A bonds are issued, and the bonds will be remarketed on that date for successive one-year periods unless the bonds are earlier refinanced or converted. There is no liquidity facility or a covenant on behalf of McLaren Health Care Corporation (MHCC) to maintain certain liquidity levels. If MHCC is unable to refinance or convert the bonds on a mandatory tender date they will be purchased. If the bonds are not purchased on any tender date, an event of default will be deemed to occur and the bonds will bear interest at Bond Market Association (BMA) plus 250 basis points for six months and BMA plus 500 basis points thereafter until purchased. Bond proceeds will be used to current refund series 1993A bonds and other loans, and pay costs of issuance. The bonds are expected to price the week of Feb. 7 via negotiation led by Citigroup Global Markets Inc.

MHCC's 'AA-' rating is primarily due to its solid operating profitability, very strong debt service coverage, successful integration of Bay Regional Medical Center (BRMC) and improved liquidity position. Through 12 months ended Sept. 30, 2004, MHCC posted a 3.5% operating margin ($32.3 million income from operations), which follows a 3.1% operating margin in fiscal 2003. MHCC's solid operating profitability is supported by continued financial improvement at BRMC, which has been driven by improved expense management, increased managed care contracting leverage, and enhanced revenue cycle management, among other initiatives. MHCC's maximum annual debt service (MADS) coverage was very strong at 6.3 times (x) in fiscal 2004, which also reflects solid investment income ($7.1 million). At Sept. 30, 2004, MHCC had 161 days cash on hand and 175.6% cash to debt, increasing from 118 days and 85.1%, respectively, at fiscal year-end 2001, which was partly due to limited capital spending in recent years.

Credit concerns include an increasing debt burden, recent operating losses at MHCC's largest facility, strong union representation, and operations in competitive markets. In late 2005, MHCC plans to issue approximately $140 million of debt to fund various capital projects in each of its markets. In fiscal 2004, 459-bed McLaren Regional Medical Center (MRMC) posted a slight operating loss; however, management stated that cost containment initiatives have supported operating profitability at this facility in fiscal 2005. Nevertheless, unfavorable demographic characteristics of the service area, which includes the Flint market, remain an ongoing concern. A significant union presence at MHCC's facilities, with approximately 40% of registered nurses unionized, led to significant historical wage increases and a nurses' strike at MRMC in 2001. Despite an overall leading market share position of 36.8%, MHCC operates in competitive markets, with its two largest facilities, MRMC and Ingham Regional Medical Center, maintaining the number two and number three positions in their respective markets.

The Rating Outlook is Stable. Although MHCC's proposed bond issuance for late 2005 will increase its debt burden considerably, Fitch believes that recent levels of profitability will allow MHCC to absorb the additional debt without any downward rating pressure. Management budgeted for a 3.3% excess margin in fiscal 2005, which is considered attainable by Fitch. MHCC has covenanted to provide quarterly and annual disclosure of financial statements to bondholders. Recent quarterly disclosure to Fitch has been timely and includes a balance sheet, income statement, and utilization statistics. However, Fitch notes the lack of a statement of cash flows and management discussion and analysis.

Headquartered in Flint, Michigan, MHCC is a large, integrated multi-hospital system with a total of 1,207 staffed beds (1,485 licensed) at six hospitals located in the cities of Flint, Lapeer, Lansing, and Bay City, Michigan. Total operating revenue in fiscal 2004 was $924.7 million.