Fitch Affirms Diakon Lutheran's (Pennsylvania) Bonds at 'BBB+'; Outlook to Negative
CHICAGO-(Business Wire)-September 16, 2009 - Fitch Ratings affirms the Cumberland County Municipal Authority's (the authority) fixed rate bonds issued on behalf of Diakon Lutheran Social Ministries (Diakon) as follows:
—Approximately $62 million series 2007A at 'BBB+'.
Fitch also affirms the 'BBB+' unenhanced rating on Diakon's approximately $86.7 million series 2003D and 2007B variable rate bonds at 'BBB+'. (The series 2007B bonds are rated 'AA-/F1+' by Fitch based on a direct pay letter of credit from Wachovia Bank, N.A.)
The Rating Outlook is revised to Negative from Stable.
The Negative Outlook is predicated on Diakon's current debt structure, comprised of nearly $121.4 million in variable rate demand bonds, or 67% of total debt outstanding. Nearly $86.7 million in series 2003D and 2007B notes are backed by direct pay letters of credit set to expire in September 2010. Under a bank bond scenario, Diakon would be forced to meet an accelerated amortization of the principal outstanding within one year. Although it appears Diakon would survive such a scenario, their overall credit profile would be severely and materially weakened. Fitch is aware that management is currently working with its advisors on a plan to remedy these risks, which likely will include some restructuring over the next three to six months. Fitch will re-evaluate Diakon as details of any restructuring become available.
The affirmations reflect Diakon's ability to quickly manage through recent operating performance that was weaker than historical performance, primarily driven by recessionary effects. Fitch believes Diakon's wide scope of operations in numerous markets and solid occupancy levels have given management further leverage to right the operations over the last year.
As one of the largest not-for-profit retirement care providers in its service area, encompassing parts of Pennsylvania and Maryland, Diakon realizes significant economies of scale. Moreover, despite a more difficult operating environment, Fitch believes Diakon's repositioning strategy will benefit the organization going forward by better aligning operations allowing for efficiency gains over the long-term. Although operating performance was off through the first six months of fiscal 2008, resulting in weaker fiscal year end (FYE) 2008 metrics, Diakon's management quickly responded and initiated various operating strategies that stemmed the losses which resulted in four consecutive quarters of positive performance. Through the six-month interim period ending June 30, 2009, Diakon reported $0.87 million in excess income, better than the negative $4.29 million recorded at FYE 2008. Although the weaker operating metrics in FY08 did cause maximum annual debt service coverage to decline to 1.4 times (x), down from FY07 and FY06 levels of 2.4x, the operating turnaround demonstrated over the interim period has improved coverage to 1.6x. Further offsetting some of the recessionary operating pressures, Diakon's maximum annual debt service as a percent of annualized revenue of 6.5% continues to moderate from historical levels and remains stronger than Fitch's 'BBB' median of 11%. Finally, although occupancy in all levels of care has modestly declined through the interim period, occupancy rates remain relatively strong with 90.9%, 91.4%, 97.1%, respectively for independent living, assisted living, and skilled nursing.
Rating drivers for Diakon include a successful restructuring of its current debt profile and continued positive operating performance. Downward rating pressure would likely ensue if Diakon does not satisfactorily mitigate the risks associated with its current variable rate demand bonds.
Diakon Lutheran Social Ministries, headquartered in Allentown, PA, is composed of 999 skilled nursing beds, 625 assisted living units and 905 independent living units located in Pennsylvania and Maryland. Total revenue at FYE 2008 was $186.5 million. Diakon covenants to disclose annual audited financial statements and quarterly disclosures. Fitch considers Diakon's disclosure to be very sound. Diakon holds quarterly investor calls and posts all of its disclosure via 'zieglerresearch.com'; which includes quarterly financial statements (balance sheet, income statement, and statement of cash flows), detailed utilization trends, and payor mix trends. Additionally, Diakon issues a detailed investor presentation in advance of its quarterly update call.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '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.
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