|[May 01, 2014]
Fitch Affirms McLaren Health Care's (MI) Revs at 'AA-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'AA-' rating on the following bonds
issued on behalf of McLaren Health Care (McLaren):
--$100.4 million Michigan Finance Authority series 2012A hospital
--$208.5 million Michigan State Hospital Finance Authority series 2008A
--$158.3 million Michigan State Hospital Finance Authority series 2008B
variable demand rate revenue bonds;
--$75.2 million Michigan State Hospital Finance Authority series 2005C
The Rating Outlook is Stable.
Bond payments are secured by a pledge of the gross revenues of the
KEY RATING DRIVERS
MODEST DEBT BURDEN: McLaren's debt burden is very light with maximum
annual debt service (MADS) equal to 1.7% of operating revenue in fiscal
2013. The modest debt burden allows for solid MADS coverage by EBITDA of
4.8x despite light operating profitability.
LEADING MARKET SHARE: McLaren maintains a leading 24.3% market share in
its total service area (excluding its two most recent acquisitions in
2014); however, the service area remains competitive and economically
challenged. McLaren has doubled the size of its system over the last six
years through acquisition activity resulting in 12 acute care hospitals
spread throughout southeast central, eastern and northern Michigan.
LIGHT OPERATING PROFITABILITY: McLaren's profitability levels have been
historically light relative to the 'AA' category rating medians.
However, operating margins have been consistent, averaging 2.6% since
fiscal 2010 and equal to 2.6% in fiscal 2013 despite a challenging payor
mix. The system's light operating profitability is mitigated by its
light debt burden.
SOLID LIQUIDITY RELATIVE TO DEBT: Unrestricted liquidity levels have
consistently grown over the past five years due to operating cash flows
and investment gains. Liquidity metrics are solid relative to debt with
26.6x cushion ratio and 177.5% cash to debt at Dec. 31, 2013, but remain
light relative to operating expenses with 172.5 days cash on hand.
SUSTAINED COVERAGE METRICS: Fitch expects that McLaren will continue to
achieve consistent operating cash flows which, in combination with the
system's light debt burden, will provide for coverage consistent with
the 'AA-' rating. Compression of operating cash flow, or an increase in
McLaren's debt burden, could result in negative rating pressure if
coverage metrics are materially impacted.
McLaren is a large, integrated multi-hospital system, headquartered in
Flint, MI, operating 12 hospitals and a health insurance plan in a 48
county service area in Michigan. McLaren has grown its health plan and
operates a profitable managed care business with over 128,000 Medicaid
lives, 30,000 commercial lives and 35,000 self-insured lives. Total
system-wide operating revenue equaled $2.5 billion in fiscal 2013.
The system has grown through a series of acquisitions in recent years
including expansion in the following regions: Macomb (2007), Oakland
(2007), Central Michigan (2010) and Northern Michigan (January 2012).
Additionally, McLaren acquired CareSource of Michigan, a health insurer
covering 35,000 Medicaid lives in August 2012, further expanding its
health insurance operations. Total operating revenues increased 40.5%
betwee fiscal years 2008 and 2013 reflecting the growth activity.
Most recently, McLaren acquired the Karmanos Cancer Institute (Karmanos)
on Jan. 1, 2014. Karmanos is one of 41 comprehensive cancer centers in
the U.S. (as designated by the National Cancer Institute) and provides
cancer care through three campuses. Total operating revenues equaled
approximately $230 million in fiscal 2013. McLaren plans to expand
Karmanos' operating platform throughout its Michigan service area. The
acquisition involved a capital commitment over five years and did not
involve an upfront capital outlay.
Additionally, McLaren acquired Port Huron Hospital effective May 1,
2014. Port Huron Hospital is a 186 bed community hospital with $200
million in annual operating revenue located in Port Huron, MI, on the
eastern edge of McLaren's service area.
MODEST DEBT BURDEN
McLaren's light debt burden is a primary credit strength, allowing for
solid MADS coverage despite light operating profitability. MADS as a
percent of revenue decreased from 2.2% in fiscal 2011 to a very light
1.7% in fiscal 2013. The decreasing debt burden reflects the system's
organic revenue growth and growth through acquisitions. MADS coverage by
EBITDA and operating EBITDA of 4.8x and 4.4x, respectively, are
consistent with Fitch's 'AA' category medians of 5.0x and 4.3x and
compare favorably to McLaren's 'AA-' peers.
Management is contemplating the construction of a new cancer center and
a new patient tower on one of McLaren's campuses. The projects are
subject to CON approval and could be funded by a bond issuance. Fitch
will assess the impact of any new debt to McLaren's credit profile as
more details become available.
LEADING MARKET SHARE
McLaren maintains a leading 24.3% market share in a competitive service
area, not including Port Huron Hospital and Karmanos. However, the
system's total service area market share has decreased from 26.1% in
2009, highlighting the competitive nature of the service area. Among its
eight operating regions, McLaren holds the number one market position in
five regions. Additionally, Port Huron Hospital holds a leading 60%
market share in its primary service area and Karmanos is a leading
provider of cancer services in Michigan.
LIGHT OPERATING PROFITABILITY
Operating profitability has been historically light for the rating
category, but consistent. Operating margin averaged 2.6% between fiscal
years 2010 and 2013, equaling 2.6% in fiscal 2013, and is light relative
to Fitch's 'AA' category median of 4.2%. The consistent profitability
levels reflect effective management practices and cost controls.
McLaren's personnel costs equaled a very low 41.3% of total revenues in
fiscal 2013 and are among the lowest in Fitch's rated portfolio. The
light operating profitability reflects McLaren's challenging payor mix
and service area characteristics, with Medicare and Medicaid accounting
for 65.1% of gross revenues.
The system's high exposure to Medicare and Medicaid is a key credit
concern, making the system vulnerable to state and federal budget cuts.
Fitch notes the McLaren's payor mix has deteriorated somewhat over the
past five years with Medicare and Medicaid increasing from 61.2% of
gross revenues in fiscal 2009 to 65.1% while commercial payors decreased
from 35.4% to 31.5%.
SOLID LIQUIDITY RELATIVE TO DEBT
Unrestricted cash and investments increased 24.3% since Sept. 30, 2012
to $1.1 billion at Dec. 31, 2013. Liquidity metrics are solid relative
to McLaren's modest debt burden with 26.6x cushion ratio and 177.5% cash
to debt, comparing favorably to Fitch's 'AA' category medians of 23.4x
and 173.6%. Despite the increase in absolute liquidity, liquidity
remains light for the rating category relative to operating expenses
with 172.5 days cash on hand comparing unfavorably to Fitch's 'AA'
category median of 254.3 days.
McLaren covenants to provide annual disclosure within 120 days of the
end of the fiscal year and quarterly disclosure within 45 days of the
end of each fiscal quarter. Disclosure is provided through the Municipal
Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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