CHANNELS

Subscribe to the InfoTech eNewsletter

infoTECH News

TMCNet:  Fitch Affirms McLaren Health Care's (MI) Revs at 'AA-'; Outlook Stable

[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 revenue bonds;

--$208.5 million Michigan State Hospital Finance Authority series 2008A revenue bonds;

--$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 revenue bonds.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a pledge of the gross revenues of the credit group.

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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.

DISCLOSURE

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


[ InfoTech Spotlight's Homepage ]


blog comments powered by Disqus

FOLLOW US

Subscribe to InfoTECH Spotlight eNews

InfoTECH Spotlight eNews delivers the latest news impacting technology in the IT industry each week. Sign up to receive FREE breaking news today!
FREE eNewsletter