Demand for higher-yielding paper outweighed the impact of a recent downgrade Tuesday as Michigan-based McLaren Health Care priced a $600 million deal.
“We are very pleased with both the market environment and the receptiveness of our investors with respect to this particular issue,” said McClaren chief financial officer David Mazurkiewicz. The Michigan Finance Authority was conduit issuer.
Ahead of the deal, Moody’s Investors Service downgraded the system’s one notch to A1 because the new borrowing represents a 55% increase in the system’s overall debt burden.
Moody’s revised the outlook to stable from negative at the lower rating.
“The rating reflects near term challenges with executing on several large in-flight capital projects at a time when leverage metrics are expected to remain suppressed,” Moody’s said. “The revision of the outlook reflects longer term stability of debt, balance sheet and operating metrics relative to the rating level as the system absorbs the proposed debt issuance and executes on identified capital projects.”
Fitch Ratings rates the bonds AA-minus. The outlook is stable.
JPMorgan was senior manager. Goldman Sachs and PNC Capital Markets were co-managers. Dickinson Wright PLLC is bond counsel.
The deal's spreads landed within range of similarly rated healthcare deals, said Daniel Berger, senior market strategist for Municipal Market Data-Refinitiv.
“It looks like there are no concerns and investors didn’t demand an extraordinary return on these,” Berger said. “It’s very well received for a healthcare deal.”
The deal offered 5 % coupons. A 2034 maturity landed at a spread of 48 basis points to MMD's AAA benchmark. “We currently have A-rated hospital bonds at 57 basis points,” he said. “So it tells you that the market thinks these are appropriately rated."
Howard Cure, director of municipal bond research at Evercore Wealth Management, said the bonds may have benefited from investor appetite for yield. “They were downgraded and there is some risk and they are getting more involved with MDWise,” Cure said.
Nearly $10 million of operating losses at MDwise contributed to McLaren’s compressed operating result, according to Fitch.
“Management reports that MDwise is now profitable and the system's total health plan operations generated a 1.1% operating margin in unaudited six-months fiscal 2019.”
The proceeds will fund capital projects, including a replacement hospital for McLaren Greater Lansing in partnership with Michigan State University.
This partnership will take the system's two existing Lansing hospitals and combine them into one facility on the MSU campus. The replacement hospital will provide state-of-the-art services, increase research capacity and further develop the relationship with the university.
“We expect this to continue to enhance the system's brand and attract additional market share,” Moody’s said, adding that the system’s strong market position will continue to be pressured by statewide consolidation and competition from other sizable systems such as Aa2-rated Ascension Health Alliance, A1-rated Beaumont Health, and A1-rated Sparrow, each with multiple sites in Michigan.
The healthcare system reported $5 billion in revenues in fiscal 2018.
