Fitch Rates Casa de las Campanas (CA) Ser 2010 Bonds 'BBB+'; Downgrades Ser 2007A&B; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB+' rating to the following ABAG Finance Authority for Non Profit Corporations, California revenue bonds:

--$33.3 million series 2010A;

--$17.5 million series 2010B;

--$4.6 million series 2010C.

In addition, Fitch downgrades to 'BBB+' from 'A-' the underlying ratings on the following ABAG Finance Authority for Non Profit Corporations variable-rate demand revenue bonds:

--$28.2 million series 2007A;

--$15.2 million series 2007B:

The Rating Outlook is Stable.

The series 2010 bonds are expected to sell via negotiation during week of Jan. 18, 2010. Casa de las Campanas (CDLC) and ABAG Finance Authority expect to enter into a contract of insurance with the Office of Statewide Health Planning under the California Health Facility Construction Loan Insurance Program. Fitch expects to issue a rating based on the insurance at closing. Bond proceeds will be used to refund CDLC's outstanding series 2007A and series 2007B bonds issued through ABAG Finance Authority, fund a termination payment on a swap contract related to the series 2007A bonds, provide approximately $4 million for various capital expenditures, fund a debt service accounts on the series 2010 bonds and pay cost associated costs of issuance.

RATING RATIONALE:

--CDLC's unrestricted cash and investments position has declined since FY 2007 falling to $27.4 million at FYE 2009 from $39.3 million at FYE 2007. As a result, days cash on hand, cushion ratio and the percentage of cash to debt at July 31, 2009 was 399, 10.2 times(x) and 66%, respectively as compared to 613, 14.7x and 82% at FYE 2007.

--Due to the weak residential housing market, CDLC has experienced lower occupancy and a lower turnover rate in its independent living units. As a result debt service coverage in FY 2009 dipped to 2.5 times(x) from 4.5x and 4.2x in FY 2008 and 2007, respectively.

--Upon closing of the series 2010 issue, CDLC's debt burden will increase materially with pro-forma MADS equating to a high 13% of fiscal 2009 compared to prior MADS being just 8.5% of FY 2009 revenues.

--In January 2009, management implemented various cost controls which is expected to reduce operating expense by roughly $2 million annually.

KEY RATING DRIVERS:

--The successful refunding of CDLC's series 2007 variable-rate demand bonds into a fixed-rate mode.

--Raising independent living units (ILUs) occupancy to historic levels.

SECURITY:

Gross revenue pledge and a lien on the real property and fixtures of the corporation.

CREDIT SUMMARY:

The downgrade to 'BBB+' is triggered by the decline in CDLC's liquidity position, the increased debt burden associated with series 2010 bonds and lower occupancy and entrance fee receipts in fiscal 2009. At FYE 2009, CDLC's unrestricted cash and investment position had dropped to $27.4 million from $41 million at FYE 2008 due primarily to unrealized losses in its investment portfolio of which more than 80% is invested in equities and alternatives. At Oct. 31, 2009 CDLC's unrestricted cash and investments had further declined to $23.9 million due to a $1.8 million swap termination payment and accelerated principal payments on the series 2007B bonds which are currently in bank bond mode. As a result, CDLC's liquidity ratios at Oct. 31, 2009 have weakened with days cash on hand of 351, cushion ratio (based on pro-forma MADS) of 5.8x and cash to long term debt of 60% as compared to FY 2008's liquidity ratios of 598 DCOH, 10x cushion ratio and 90% cash to long term debt.

The series 2010 bonds are being issued to refund CDLC's series 2007 variable-rate demand bonds (VRDBs) which are supported by letter of credits issued by JP Morgan Chase Bank, N.A. The series 2007B are currently in a bank bond mode due to non-renewal of the LOC requiring quarterly principal payments. While Fitch views the conversion of CDLC debt to a fixed-rate mode positively, CDLC's debt burden will increase materially upon closing of the series 2010 issue. Pro-forma maximum annual debt service (MADS) of $4.1 million represents a 50% increase from the prior MADS of $2.7 million and equates to somewhat high 13% of fiscal 2009 revenues (compared to the 2009 'BBB' median of 11.8%). On a pro-forma basis, adjusted debt to capitalization at Oct. 31 rises to 53.2% from 44.8%.

Due to the poor economy and weak housing market, occupancy in CDLC's ILUs dropped below 90% for the first time in the past five years. Net entrance fee received in 2009 was $4 million as compared to $8.7 million, $9.8 million and $7.9 million in FY 2008, 2007 and 2006, respectively, causing historical pro-forma coverage to slip to 1.6x in 2009 from 2.9x in FY 2008. Management implemented a variety of cost savings in January 2009 which should be fully realized in FY 2010. In addition, various marketing programs and a stabilization local housing values are expected to increase units sales in FY 2010 relative to FY 2009.

CDLC benefits from modest competition in its service area with just one other continuing care retirement community (CCRC) facility located within a 19 mile radius and the nearest type-A facility over 20 miles away. Moreover, CDLC's entrance fees are very affordable when compared against local home values. Finally, Fitch views CDLC's management contract with Life Care Services (LCS) positively.

The accelerated amortization on the series B bonds could keep liquidity down should CDLC be unable to refinance its indebtedness. In addition, the letter of credit on the series A bonds expires in one year and is not expected to be extended.

The Stable Outlook reflects CDLC's solid market position, competitive pricing and the recent stabilization in housing values which is expected to lead to higher sales and improved occupancy in FY 2010. The Outlook assumes successful refinancing of CDLC's series 2007 bonds with a fixed-rate series 2010 issue and elimination of the bank letter of credit renewal risk. Should CDLC be unsuccessful in refunding the series 2007 bonds, Fitch will review the rating.

CDLC is a type-A CCRC located in Rancho Bernardo, CA (approximately 25 miles north of San Diego). The community consists of 380 independent living apartments, 38 assisted living units, 27 assisted living dementia care units and 82 skilled nursing beds. In fiscal 2009, CDLC had total revenues of $30.3 million. CDLC provides annual audits within 150 days of each fiscal year end and quarterly, un-audited financials within 45 days of each quarter end through the Municipal Rule Making Board's EMMA system.

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