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TMCNet:  Fitch Affirms Christian Homes, Inc., Illinois Revs at 'BBB-'; Outlook Stable

[June 09, 2014]

Fitch Affirms Christian Homes, Inc., Illinois Revs at 'BBB-'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Christian Homes, Inc. (CHI):

--$24,590,000 Illinois Finance Authority (Christian Homes, Inc. Obligated Group Project), Revenue Refunding Bonds, Series 2010

--$34,235,000 Illinois Finance Authority Revenue Refunding Bonds, Series 2007A

--$6,600,000 City of Crown Point, Indiana Revenue Refunding Bonds, Series 2007D

--$7,660,000 County of Pottawattamie, Iowa Revenue Refunding Bonds, Series 2007E

--$11,395,000 Industrial Development Authority of the City of Joplin, Missouri Revenue Refunding Bonds, Series 2007F

The Rating Outlook is stable.

SECURITY

Bonds are secured by a pledge of gross revenues, first lien mortgage and security interest in the facilities, and a debt service reserve fund.

KEY RATING DRIVERS

STABLE FINANCIAL PERFORMANCE: CHI had an operating ratio of 95.5% and debt service coverage of 1.8 times (x) in the nine month fiscal 2014 interim period (June 30 year end), solid for the rating level and consistent with the prior five audited years.

STABLE OCCUPANCY: Total occupancy has remained consistently in the mid 80% range and stood at 83% across the system as of March 31, 2014, slightly lower than the prior year. CHI revenue is driven heavily by skilled nursing (more than 1,500 beds in service) and the strength of its SNF occupancy, consistently between 85 and 90% has led to solid revenue only coverage that has averaged 1.7x over the last four audited years.

MANAGEABLE DEBT BURDEN: CHI's MADS as a percentage of revenue is very good at 6.9% at March 31, 2014, below Fitch's 'BBB' category median of 12.4%.

THIN LIQUIDITY: CHI had $41.1 million in unrestricted cash and investments as of March 31, 2014, which equated to 107.3 days cash on hand, a 3.9 times (x) cushion ratio, and 36.7% cash-to-debt, all below the category medians, but liquidity has improved year over year.

REVENUE SIZE AND GEOGRAPHIC DIVERSITY: Fitch believes CHI's revenue size - $126.1 million in patient service revenue in fiscal 2013 - and its geographic diversity with facilities in four states help mitigate concerns regarding CHI's reliance on government reimbursement. Approximately 75% of CHI's payor mix is derived from government sources.

COMPETITIVE SERVICE AREAS: CHI operates in fairly competitive markets, especially for skilled nursing, which keeps pressure on CHI to maintain referral relationships and to continue to invest in its plant.

RATING SENSITIVITIES

MAINTAINING OPERATING PERFORMANCE: CHI's ability to maintain current levels of occupancy is essential for sustaining adequate levels of financial performance. A falloff from current performance levels, which is not expected, that also weakens liquidity could pressure the rating.

CREDIT PROFILE

CHI is a large senior living system that operates 11 facilities in four different states: Illinois, Indiana, Iowa and Missouri. In fiscal 2013, CHI had $134.3 million in total operating revenue. The rating and analysis are based on the CHI obligated group, which as of March 31, 2014 consisted of 11 facilities, with 552 ILUs, 285 assisted living units (ALUs) and 1,544 nursing care beds.

The affirmation of the 'BBB-' rating is supported by CHI's stable financial profile and operating performance in the historical period and through the nine-month interim period. CHI's performance is characterized by good operating ratios, stable occupancy, and strong revenue only coverage. Credit concerns include light liquidity for the rating category and reliance on government payors, which is heightened by the stress at the state level in Illinois (Fitch GO bonds rated 'A-'/Negative Outlook).

GOOD OPERATING PERFORMANCE

CHI's operating ratio over the last four audited years has averaged 93.8% and its net operating margin 11.2%, compared to Fitch's 'BBB' category median of 97.2% and 9.9% respectively. This level of performance has been sustained through the nine month interim period, with a 95.5% operating ratio and an 8.9% net operating margin. CHI management has controlled expenses very well, with total operating expenses down approximately 1% year over year in the nine month interim period.

In addition, CHI continues to pursue revenue enhancing strategies across its system, with a focus on diversifying itsservice lines, revenue streams, and geographic locations. At the Bensenville facility, located outside Chicago, CHI has completed a repositioning project that has brought AL units onto the campus by reconfiguring and reducing the ILUs. All the new AL units are now occupied. At Hickory Point in the Decatur/Forsyth area, CHI is contemplating a further expansion of its successful short term rehabilitation unit, which it built with the 2010 bond issue.

In fiscal 2013, CHI sold its Pleasant Meadows Christian Village (Pleasant Meadows), located in Chrisman, IL. CHI netted about $1.2 million on the sale of the facility, which had no debt. The sale of Pleasant Meadows reflects CHI's strategy to both reduce its exposure to Illinois and advance its rehabilitation growth strategy, as Pleasant Meadows is located in a fairly isolated part of Illinois, with no nearby hospitals to use as a referral source.

In Indiana, CHI has developed an arrangement to lease its facilities from the county in order to maximize state level reimbursement. This relationship began in fiscal 2013 and is reflected as a reduction in patient service revenue, which fell to $126.1 million from $133.2 million in fiscal 2012, as the amounts of CHI receives comes in the form of supplemental payments. CHI management reports that the bottom line reimbursement, net of the lease payments, it now receives has improved in Indiana as a result of this program.

SLIGHTLY IMPROVED LIQUIDITY POSITION

CHI had $41.1 million in unrestricted cash and investments as of March 31, 2014, which equated to 107.3 days cash on hand, a 3.9 times (x) cushion ratio, and 36.7% cash-to-debt, all below Fitch's 'BBB' category medians, of 371.3, 6.9, and 58.9, respectively.

Liquidity has improved year over year, with unrestricted cash and investments growing by approximately 14% from March 31, 2013. The sale of Pleasant Meadows and CHI's continued stable cash flow has helped grow unrestricted liquidity, but CHI has also been helped by improvements on the timing of Medicaid payments from the state of Illinois. Accounts receivable (AR), which was at $19.5 million at March 31, 2013 and largely reflects owed payments from Illinois, improved to $15.1 million by March 31, 2014. CHI generally receives a payment right at its fiscal year end, and Fitch expects both liquidity and AR to further improve by year's end.

MANAGEABLE DEBT BURDEN

CHI's MADS as a percentage of revenue is very good at 6.9% at March 31, 2014, below Fitch's 'BBB' category median of 12.4%, and its debt to net available, at 5.8x, was also better than Fitch's category median of 6.6x. Both of these reflect CHI's manageable debt burden.

Debt service coverage has remained stable, with revenue-only coverage averaging 1.7x over the last four audited years. Through the nine months ended March 31, 2014 revenue-only coverage was 1.8x. Fitch's maximum annual debt service figure of $10.6 million includes CHI's corporate debt, which CHI issued from its corporate offices in the 1990s. The corporate debt, which is a general obligation and subordinate to the master trust indenture debt, is taxable and variable rate. The interest rate resets every three or five years, and the interest rates have generally been around 5.5%.

Fitch notes positively that CHI continues to pay down extra principal on the corporate debt, and the outstanding principal is currently at $30 million, down from $40 million when Fitch first rated CHI in 2010. Additionally, CHI's debt service calculation for covenant compliance includes the extra principal that CHI pays down during the year. CHI's debt service coverage not including these additional principal payments would be closer to 2 to 2.2x. This provides a measure of financial flexibility, as CHI could reduce the extra payments its making should it have a challenging operating year.

Total outstanding long term debt at March 31, 2014 was $112 million and is approximately 73% fixed rate and 27% variable rate. CHI maintains a $15 million line of credit, which could be used for any potential puts of the corporate debt, and no amounts are currently drawn. The line of credit is secured under the MTI (News - Alert).

In last year's press release Fitch noted that CHI was contemplating a potential debt issuance and was actively pursuing acquisitions. CHI management indicated that the debt plans are on hold and that while the organization remains interested in acquisitions, none of the potential acquisitions to date have been completed after CHI's further analysis. Fitch notes the postponement of the debt issuance positively as CHI's manageable debt burden is a key credit strength. Fitch also notes that CHI's management team has shown fiscal discipline, which mitigates some of the credit concern should CHI pursue an acquisition.

DISCLOSURE

CHI disclosure requirements under its bond documents include the submission of annual audited statements within 150 days of fiscal year end and quarterly unaudited statements within 45 days of quarter end to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Guidelines For Nonprofit Continuing Care Retirement Communities' (July 10, 2013).

--'Nonprofit Nursing Home Rating Criteria' (July 5, 2013).

Applicable Criteria and Related Research:

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

Nonprofit Nursing Home Rating Criteria -- Effective July 5, 2012 to July 5, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682128

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833687

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.


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