Update: MOODY'S UPGRADES MCLAREN HEALTH CARE CORPORATION'S (MI) LONGTERM AND UNDERLYING RATINGS TO Aa3 FROM A1; OUTLOOK REVISED TO STABLE FROM POSITIVE AT THE HIGHER RATING LEVEL UPGRADE AFFECTS APPROXIMATELY $538 MILLION OF RATED DEBT OUTSTANDING
Michigan State Hospital Finance Authority
Health Care-Hospital
MI
Opinion
NEW YORK, Dec 23, 2009 -- Moody's Investors Service has upgraded McLaren Health Care Corporation's (McLaren) long-term and underlying ratings to Aa3 from A1.  The outlook is revised to stable from positive at the higher rating level.  This action affects approximately $538 million of rated bonds issued through the Michigan State Hospital Finance Authority, including approximately $167 million of Series 2008B variable rate demand obligation (VRDO) revenue bonds (which are supported by a letter of credit from JPMorgan Chase Bank).  The upgrade reflects the system's continued improved cash flow generation and liquidity position, due in part to the successful integration of Mount Clemens Regional Medical Center (MCRMC) and POH Regional Medical Center (POHRMC) into the system over the last three years.  McLaren is an integrated healthcare delivery system that operates hospitals in six distinct markets in Michigan: 21,600-admission McLaren Regional Medical Center (MRMC) in Flint; 17,500-admission Bay Regional Medical Center (BRMC) in Bay City; 18,500-admission Ingham Regional Medical Center (IRMC) in Lansing; 7,500-admission Lapeer Regional Medical Center (LRMC) in Lapeer; 15,600-admission MCRMC in Mount Clemens (McLaren became the sole corporate member of MCRMC effective January 1, 2007 and MCRMC is included in McLaren's audited financial statements starting fiscal year 2007); and 5,900-
admission POHRMC in Pontiac (McLaren became the sole corporate member of POHRMC in October 2007 and is included in the system's audited financial statements starting fiscal year 2008).  LEGAL SECURITY:  McLaren uses a designated affiliate structure, which we believe is a weaker structure than a joint and several obligation, given that significant assets and cash flows are outside of the obligated group.  The bonds are a direct obligation of the McLaren obligated group, currently the only member of which is the McLaren Health Care Corporation (parent).  The parent holds approximately 9% of total McLaren system assets and generates minimal cash flows.  The bonds are secured by a security interest in the Gross Revenues of the members of the credit group. MRMC, BRMC, LRMC, IRMC, MCRMC, POHRMC, the Lapeer Regional Medical Center Foundation, the McLaren Foundation, and Mount Clemens Regional Healthcare Foundation are designated affiliates and members of the McLaren credit group.  INTEREST RATE DERIVATIVES:  McLaren has three interest rate swaps in place.  (1) In connection with the Series 2008B VRDO bonds, McLaren entered into a floating-to-fixed interest rate swap (current notional amount of $92.2 million) with Citibank (this swap originally had been in connection with the Series 2005A indexed put bonds, which were refunded after issuance of the Series 2008B bonds).  Under the swap, which runs for the life of the bonds, McLaren pays a fixed rate of 3.355% and receives 65% of LIBOR plus 0.12%.  (2) Also in connection with the Series 2008B VRDO bonds, McLaren entered into a floating-to-fixed interest rate swap (current notional amount of $75.0 million) with Citibank (this swap originally had been in connection with the Series 2005B indexed put bonds).  Under the swap, which runs for the life of the bonds, McLaren pays a fixed rate of 3.64% and receives 65% of LIBOR plus 0.12%.  (3) McLaren has a basis swap in place (current notional amount of $225 million) with Citibank. Under the swap, McLaren pays SIFMA and receives 61.3% of LIBOR plus 0.77%.  The combined mark-to-market of the three swaps as of December 8, 2009 was -$20 million (the collateral posting threshold is -$15 million).  STRENGTHS  *Sizeable and growing health system with approximately $1.7 billion of system operating revenues in unaudited fiscal year (FY) 2009 with geographic expansion and diversification across six markets in lower Michigan.