Fitch Rates McLaren Health Care Corporation -MI- Bonds 'AA-'; Outlook Stable.

NEW YORK -- Fitch Ratings has assigned an 'AA-' rating to the following Michigan State Hospital Finance Authority (McLaren Health Care Corporation) bonds:

--$75 million indexed put bonds, series 2005B;

--$80 million fixed-rate revenue bonds, series 2005C.

Fitch also affirms the 'AA-' rating on

--$99.9 million indexed put bonds, series 2005A;

--$78.7 million revenue and refunding bonds, series 1998A.

The Rating Outlook is Stable. Bond proceeds will be used to fund various expansion and renovation projects in all of MHCC's markets. The bonds are expected to price the week of June 13 via negotiation led by Citigroup Global Markets Inc.

There is a mandatory tender three years after the series 2005B 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.

MHCC's key credit strengths continue to be its strong operating profitability and debt service coverage, successful integration of Bay Regional Medical Center (BRMC), and improved liquidity position. Through the 12 months ended Sept. 30, 2004, MHCC posted a 3.5% operating margin ($32.3 million), and continued its strong operating profitability through six months of fiscal 2005 with a 3.1% margin. MHCC's solid operations have been supported by continued financial improvement at BRMC since it was acquired in 2001. MHCC's maximum annual debt service (MADS) coverage was very strong at 4.3 times (x) in fiscal 2004, which also reflects investment income of $7.1 million. At fiscal year-end 2004, MHCC had 117.2 days cash on hand, increasing from 82 days at fiscal year-end 2002, which was partly due to limited capital spending during this period.

Primary credit concerns are MHCC's increasing debt burden, recent operating losses at MHCC's largest facility, strong union representation, and operations in competitive markets. With this issuance, MHCC's cash to debt ratio declines to 86% from 152% as of March 31, 2005. In fiscal 2004, 459-bed McLaren Regional Medical Center (MRMC) posted a slight operating loss; however, cost containment initiatives have supported operating profitability of $3.7 million at this facility for three months ended March 31, 2005. Nevertheless, unfavorable demographic characteristics of the service area, which includes the City of Flint, 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 three positions in their respective markets.

The Rating Outlook is Stable. Although MHCC's debt burden increases considerably with this bond issuance, 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.

Headquartered in Flint, Michigan, MHCC is a large, integrated multi-hospital system with a total of 1,207 staffed beds (1,496 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. 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.