NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the rating on approximately $17 million of Illinois Finance Authority's revenue bonds issued on behalf of Lutheran Social Services of Illinois (LSSI; the institution) at 'BB+'.
The Rating Outlook is revised to Negative.
The bonds are secured by the unrestricted receivables of the obligated group, backed by a fully funded debt service reserve fund and features historical annual debt service coverage (DSCR) covenant of 1.1 times (x).
KEY RATING DRIVERS
OUTLOOK REVISION: The Negative Outlook reflects LSSI's weakened performance for two consecutive years, violation of the DSCR in fiscal 2012, and continued challenges in providing services given the state's budget cuts and low reimbursement rates.
RATING AFFIRMED: The rating reflects solid demand and essentiality of services provided by LSSI, an extensive operating history and liquidity and operational support provided by the non-obligated Cornerstone Foundation (CF; the foundation).
LIMITED LIQUIDTY: LSSI's recurring reliance on balance sheet resources including CF funds, to offset operating pressures has reduced unrestricted cash and investments at both entities to a five-year low in fiscal 2012.
VOLATILITY IN STATE FUNDING: Exacerbating high reliance on government funding (over 75%) is the state's (IL; Fitch rated 'A', Outlook Stable) practice of deferring vendor payments to manage operating deficits.
WHAT COULD CAUSE A RATING ACTION
CONTINUED OPERATIONAL CHALLENGES: Further declines in operating performance and drawdown of liquid resources coupled with a lack of improvement in the DSCR in the coming year could pressure the rating.
OPERATING DEFICITS; DSCR NOT MET
LSSI's operating performance declined for two consecutive years due to a combination of funding cuts and expense increases in certain program lines. Fiscal 2012 operations yielded a negative 3% margin, declining from fiscal 2010 and 2011 margins of 3% and 0.3%, respectively. Consequently, DSCR declined to 0.19x. While not an event of default, pursuant to the trust indenture, LSSI has retained a consultant who is expected to recommend steps to achieve fiscal balance in the coming months. The consultant will evaluate the sufficiency of rates and charges levied by the LSSI for break-even operations. Fitch does not anticipate marked improvement in performance this fiscal year, given that rates and contracts are negotiated on an annual basis.
LSSI derives over 75% of its revenues from governmental sources. These revenues have been delayed due to payment deferral measures that the state undertook to manage its accounts payable backlog. While LSSI has worked to align revenue with expenses, state program cuts and forecasted shortfalls in appropriated funds are expected to pressure operations for fiscal 2013. The uncertainty associated with timing of current state receivables and expectation that services provided in this year will experience similar delays is reflected in the Negative Outlook.
ESSENTIAL SERVICE PROVIDER
Utilization statistics for LSSI are growing; people served by the various programs for LSSI grew from about 100,000 in fiscal 2011 to 108,735 in fiscal 2012. While contract rates remain insufficient to cover costs and payment deferral challenges abound, LSSI's core mission of service is relatively insulated due primarily to its extensive history in providing state mandated social services.
FOUNDATION SUPPORTS OPERATING VIABILITY
LSSI has traditionally relied upon CF resources to support operations via an endowment grant of five percent of assets and also drawn supplemental monies for capital purposes. While the foundation is not obligated on the debt, it exists solely to support LSSI's mission and is viewed as an additional source of liquidity.
LSSI liquidity has declined markedly, from over $5 million in fiscal 2008 to less than $3 million in fiscal 2012. LSSI can access up to $6.5 million of CF funds at any given time. Consequently the rating reflects LSSI access to CF assets. As of fiscal year end (FYE) 2012 LSSI and CF had unrestricted cash and investments (available funds) totaling $15 million which constituted 15.3% of operating expenses and 82.4% of long-term debt. The investment allocation for both LSSI and CF are similar with 30% domestic equity, 40% fixed income, 12% alternative investments and the remainder invested in international equity. Fitch considers the investment allocations for LSSI and CF moderately conservative which should limit volatility in the combined financial cushion that supports the obligated group's rating.
MANAGEABLE DEBT BURDEN
LSSI's debt burden remains manageable at 1.5% of unrestricted operating revenue. Approximately $17 million in debt remains outstanding and MADS ($1.43 million) occurs in 2017. Fitch calculated current debt service including annual payments made on LSSI's line of credit which produced a debt burden of 2.4%, still manageable for LSSI. LSSI's $3.36 million line of credit was partially utilized ($672k) as of fiscal 2012 and covers certain operating costs as state agency payments are delayed. Fitch notes positively that there are no near term debt plans for LSSI aside from costs related to general maintenance and facility improvements.
LSSI, headquartered in Des Plaines, IL is a large, not for profit residential and social services provider. Total revenues of the obligated group was approximately $95 million in fiscal 2012. LSSI's operational viability and bond rating is hinged on support provided by its non-obligated foundation subsidiary, CF. LSSI disclosure practices are standard.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Institutions Rating Criteria (June 15, 2012);
--'Fitch Affirms Lutheran Social Services of Illinois Obligated Group, IL Revs at 'BB+'; Outlook Stable' (Dec. 23, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Institutions Rating Criteria