Fitch Rates Franciscan Communities, Inc. (IL) Series 2013A Revs 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB-' rating to the following revenue bonds expected to be issued by the Illinois Finance Authority on behalf of Franciscan Communities, Inc.:

-- $98.8 million series 2013A.

Additionally, Franciscan Communities expects to issue $28.6 million of series 2013B&C revenue bonds as direct bank placements which Fitch was not asked to rate.

The Rating Outlook is Stable.

The series 2013A&B bonds will be structured as permanent fixed rate bonds. Proceeds from the series 2013 financing will be used to refund or advance refund approximately $103.7 million of outstanding debt issued by Franciscan Communities, Inc. and University Place, Inc.; provide $18 million of new money to fund capital improvements at Franciscan Village and reimburse the borrower for prior capital expenditures; fund a debt service reserve fund on the series 2013A bonds and pay associated costs of issuance. The series 2013 bonds are expected to be priced through negotiation the week of Feb. 18.

SECURITY:

All bonds will be secured by the Franciscan Communities Obligated Group's (FCOG) pledge of gross revenues, a mortgage interest in owned and leased property of FCOG and a debt service reserve fund on the series 2013A bonds.

SENSITIVITY/RATING DRIVERS

LARGE, DIVERSE REVENUE BASE: Franciscan Communities Obligated Group (FCOG) is comprised of eight separate continuing care retirement community (CCRC) / long-term care facilities located in Illinois, Indiana and Ohio. In fiscal 2012, FCOG generated total operating revenues of $118.8 million with no individual facility accounting for more than 18% of total system revenues. Fitch believes the diversity of FCOG's facilities and revenue contribution reduces the corporation's overall operating risk profile.

SOLID CORE PROFITABILITY: FCOG has generated very solid and improving profitability from core operations, reflecting the corporation's large proportion of assisted living and skilled nursing beds (SNFs) relative to independent living units (ILUs) and the preponderance of rental residency contracts. In fiscal 2012, FCOG's operating ratio of 93.3% and net operating margin of 12.6% exceeded the respective 'BBB' category medians of 97.2% and 9.5%.

MODEST DEBT BURDEN: FCOG benefits from a modest debt burden which, combined with solid profitability from operations results in good historical coverage of pro forma maximum annual debt service (MADS). Further, Fitch views FCOG's historical 'revenue only' coverage of pro forma MADS of 1.38x and 1.53x in 2011 and 2012, respectively, positively, as the corporation is not reliant on ILU sales and entrance fee receipts to cover debt service requirements.

LIGHT LIQUIDITY: FCOG's liquidity metrics are weak when compared to 'BBB' category medians and reflect the large number of FCOG's rental contracts and percentage of SNF beds compared to the typical entrance fee community rated by Fitch. At Oct 31, 2012, FCOG had approximately $64.6 million of unrestricted cash and investments which translated to 223 days cash on hand, a 5.4x cushion ratio based on pro forma MADS and 41.9% of debt.

WEAK GOVERNANCE : While the Board Structure at FCOG and its parent, Franciscan Sisters of Chicago Service Corporation (FSCSC) are typical among religiously sponsored not-for-profit entities (i.e. board member terms, established standing committees, etc.), Fitch believes the board composition has been too low and lacked adequate professional diversity relative to the organization's scale and complexity.

CREDIT PROFILE:

The 'BBB-' rating reflects the benefits of FCOG's large and geographically diverse revenue base, solid profitability from core operations and moderate leverage position which is tempered by light liquidity indicators and weak governance.

Franciscan Communities Inc. is composed of seven separate senior living communities located in Illinois, Indiana and Ohio. Upon closing of the series 2013 bond issue, University Place, Inc., a 182-unit entrance fee CCRC located in West Lafayette, IN, will become a member of the FCOG. In total FCOG will consist of 749 ILUs, 387 assisted living/ sheltered care units and 776 SNFs. On a historical pro forma basis, the FCOG generated total operating revenues of $118.8 million in fiscal 2012 with no individual facility accounting for more than 18% of total system revenues. FCOG operates both entrance fee and rental communities, most of which are moderately priced. Fitch views the diversity of Franciscan's facilities and operations positively and believes it reduces the corporation's overall operating risk profile.

On historical pro forma basis, FCOG's operating profitability has been solid and reflects the corporation's large proportion of assisted living and SNFs relative to ILUs and the high percentage of rental residency contracts. In fiscal 2012, FCOG's operating ratio of 93.3% and net operating margin of 12.6% exceeded the respective 'BBB' category medians of 97.2% and 9.5%. However, net operating margin - adjusted - of 14.5% in fiscal 2011 and 2012 - is below the 'BBB' category median, reflecting the lower number of entrance fee contracts and turnovers.

FCOG benefits from a modest debt burden. Pro forma MADS of $12.1 million equates to a modest 9.9% of total 2012 revenues. Historical coverage of pro forma MADS on a 'revenue only' basis of 1.38x and 1.53x in fiscal 2011 and 2012, respectively, exceeds Fitch's 2012 'BBB' median of 1.0x. However, coverage of pro forma MADS including net entrance fee receipts of 1.59x in 2011 and 1.74x in 2012 trails the 'BBB' category median of 1.8x. Fitch views FCOG's historical 'revenue only' coverage positively as the corporation is not reliant on ILU sales and entrance fee receipts to cover debt service requirements.

FCOG's liquidity metrics are weak when compared to 'BBB' category medians, reflecting the large number of FCOG's rental contracts and high percentage of SNF beds compared to the typical entrance fee community rated by Fitch. At Oct. 31, 2012, FCOG had approximately $65.6 million of unrestricted cash and investments which translated to 223 days cash on hand, a 5.4x cushion ratio based on pro forma MADS, and 41.9% of debt. However, Fitch believes FCOG's liquidity position is adequate and consistent with a 'BBB' category rating due to a minimal entrance fee liability and the stability in operating performance.

Fitch's primary credit concern is the inadequacy of oversight of the Boards of Directors at FCOG and its parent, Franciscan Sisters of Chicago Service Corporation (FSCSC). While the Board structure, by-laws and reserve powers at FSCSC and FCOG are typical among religiously sponsored not-for-profit entities (i.e. board member terms, established standing committees, etc.), Fitch believes the board composition has been too low and lacked adequate professional diversity relative to the organization's scale and complexity. Fitch believes the lack of strong oversight was a key contributing factor in FSCSC's development of three non-obligated single asset CCRCs which ultimately entered into bankruptcy protection. Currently, the FCOG board is made up of three members that are members of the FSCSC board. Recently the FSCSC board added two new members bringing the total to eight. While the current management team has articulated a sound business plan, Fitch believes the board composition will need to be further expanded in order to fulfill and foster an adequate oversight function.

The Stable Outlook reflects Fitch's expectation that Franciscan will continue to maintain solid operating performance consistent with historical results. Liquidity metrics are not expected to improve materially over the near term as the corporation increases its level of capital spending from operating cash flow.

Upon closing of the series 2013 bond issue, Franciscan Communities Obligated Group will consist of eight senior living facilities located in Illinois, Indiana and Ohio. In fiscal 2012, total revenues of the pro forma obligated group were $118.8 million. Franciscan expects to release annual audited financial statements and utilization statistics within 150 days after each fiscal year end and quarterly unaudited financial statements and utilization statistics within 45 days of each quarter end. A management discussion and analysis is viewed as a management best practice.

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);

-- 'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 12, 2012)

-- 'Nonprofit Nursing Home Rating Criteria' (July 5, 2012)

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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

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Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
70 West Madison St, 11th FL
Chicago, IL 60602
or
Secondary Analyst
Michael Burger, +1-212-908-0555
Director
or
Committee Chairperson
Emily Wong, +1-212-908-0651
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
70 West Madison St, 11th FL
Chicago, IL 60602
or
Secondary Analyst
Michael Burger, +1-212-908-0555
Director
or
Committee Chairperson
Emily Wong, +1-212-908-0651
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com