CHICAGO - (Business Wire) Fitch Ratings assigns a 'BBB+' rating to the approximate $121.1 million series 2009A fixed-rate revenue and refunding bonds to be issued by the Cumberland County Municipal Authority, Pennsylvania (the authority) on behalf of Diakon Lutheran Social Ministries (Diakon). Fitch also affirms the unenhanced rating on approximately $148.7 million in outstanding bonds also issued by the authority. The series 2009A bonds are expected to be issued as fixed-rate securities. Proceeds will be used to refund $86.73 million of existing bonds (series 2003D, and series 2007B) plus associated accrued interest, provide funds for the termination or restructuring of one or more interest-rate swap agreements currently in effect, provide $25 million to meet Diakon's ongoing capital needs, fund a debt service reserve fund, and pay associated costs of issuance.
Fitch revised the Rating Outlook to Stable from Negative.
The Outlook revision is cemented in Diakon's plan to significantly decrease its exposure to risks associated with certain of its variable-rate bonds that are backed by liquidity facilities due to expire within one year. In Fitch's press release dated Sept. 16, 2009, Fitch revised the Outlook to Negative from Stable because of Diakon's debt structure, with nearly $86.7 million in series 2003D and 2007B notes that are backed by direct pay letters of credit set to expire in September 2010. With the planned refunding of these bonds with proceeds from the 2009A bonds, Diakon will sufficiently mitigate the near-term risks associated with its current debt structure.
The assignment and affirmation of the 'BBB+' rating 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 $870,000 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.
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.
Additional information is available at 'www.fitchratings.com'.
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 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 Ratings
Anthony A. Houston, +1-312-368-3180, Chicago
James Mitchell, +1-813-222-1395, Tampa
Cindy Stoller, +1-212-908-0526, New York
cindy.stoller@fitchratings.com
