Flint's McLaren Health Sets Refinance of Indexed Put Bonds, Other Debt

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CHICAGO - Flint, Mich.-based McLaren Health Care Corp. will enter the market tomorrow with $204 million of fixed-rate revenue bonds in the first of two series that together will refinance all the system's so-called indexed put bonds as well as a portion of debt taken on with a pair of recent acquisitions.

McLaren will sell the second series, $173.9 million of variable-rate demand bonds, the week of July 28. The bonds will be supported by a direct-pay letter of credit from JPMorgan Chase NA.

Proceeds will refinance $169 million of three-year-old indexed put bonds. Such bonds were part of a small debt market that has shriveled amid the credit crunch facing investment banks, typically the largest holders of indexed put bonds.

Tomorrow's fixed-rate issue will refinance $187 million of variable- and fixed-rate debt sold by Mount Clemens Regional Medical Center and POH Regional Medical Center in Pontiac, both of which McLaren acquired last year. With eight hospitals in six markets across Michigan, McLaren's operating revenue totaled $1.5 billion in fiscal 2007.

The system also owns 95 acres of land in Clarkston, Mich., where it has partnered with a private developer to build medical offices and a cancer center. The system also aims to build a new hospital on the site in the next several years if the state approves the project, said Jan Rizzo, McLaren's corporate controller.

Citi is the underwriter on both transactions. Bond counsel is Dickinson Wright PLLC. Chris Payne of Chicago-based Ponder & Co. is financial adviser. The Michigan State Hospital Finance Authority will issue the debt.

Analysts praised the credit and boosted their outlooks on its debt last week, noting the successful integration of the two new hospitals, both of which had a history of financial struggles and are rapidly improving under McLaren's management.

Moody's Investors Service revised its outlook to positive from stable while Fitch Ratings revised its outlook to stable from negative. Moody's affirmed its A1 rating on the system. Fitch rates the system AA-minus.

The fixed-rate issue includes $17.4 million in new money that will be used to buy equipment and finance renovations across the system's facilities, Rizzo said.

The variable-rate issue later this month will refund all of McLaren's three-year-old indexed put bonds, a type of floating-rate bond that does not require third-party enhancement.

The market for these bonds gained some popularity, especially among health care issuers, in 2005, with deals largely being crafted by Citi and Merrill Lynch & Co., according to Payne, McLaren's financial adviser. The bonds were not money-market eligible, and were largely held by investment banks or other "sophisticated holders," he said.

But the appetite for the bonds vanished as the collapse of the subprime mortgage market widened into a general liquidity crunch among investment banks, Payne said.

"When the bankers had capital available, they put these bond issues together and held significant chunks of these deals, but now they need all the capital they can get, so they're liquidating portfolios like this," Payne said. "With excessive demands on capital, they no longer have the capital to hold paper like this."

The initial put dates for most indexed put bonds is often several years, and often annually after that, though each deal was custom-crafted, Payne said. McLaren's two series totaling $170 million had initial put dates three years after they were issued, with the first puts in March and August of this year.

"With the put in March, we shopped them but couldn't find anybody to take them," Rizzo said. Citi, which held the bonds, initially told McLaren it would not repurchase the bonds, but eventually agreed to hold them until August so that the system could refinance both its series at once, Rizzo said.

McLaren also has two floating-to-fixed interest rate swaps in place, both in connection with the 2005 indexed put bonds. The swaps will remain place after the issuance of the upcoming debt.

After the transactions, McLaren will have a total of $529 million of debt, of which roughly half is fixed-rate.

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