2008-10-10 22:25:03 -
- Fitch Ratings has affirmed the 'BBB-' underlying rating on approximately $26.1 million County of Marion, Ohio health care facilities refunding and improvement revenue bonds, series 1993, issued on behalf of United Church Homes, Inc (UCH). UCH's series 2002 variable-debt, in the amount of approximately of $27.5 million, is not rated by Fitch. Fitch has also revised the Rating Outlook
to Negative from Positive.
The Outlook revision to Negative reflects the material drop in UCH's operating performance for the first six months of 2008 and a pending debt issuance that will increase UCH's debt burden. UCH had a negative 0.7% operating margin for the first six months of 2008 due to softening volume at a few of UCH's skilled nursing facilities and an increase in expenses led by higher health care costs in their self-funded employee health plan. An additional drag on UCH's operating margin has come from Fairhaven North, a 100-bed nursing home in Upper Sandusky that UCH purchased in 2007 using a $2.8 million line of credit. Fairhaven North is currently losing money and its census, in the low 40s, is significantly below where it needs to be to operate at break even. UCH operations were already under pressure from changes in Ohio's Medicaid, which moved from a cost plus system to a prospective payment system. This change negatively affected UCH, lowering its Medicaid reimbursement (in 2007 Medicaid accounted for approximately 42% of UCH's gross revenues).
UCH is planning a $30 million debt issuance in early to mid 2009 which will increase its overall debt burden. Proceeds from the issuance will be used to refund the series 1993 bonds and a $5 million line of credit, and provide approximately $10 million in new money for capital projects. The bonds are expected to be issued as variable-rate demand bonds. The focus of the capital projects will be on building a new wellness center at one of UCH's sites and renovations at other sites, including at Fairhaven North, to create more private rooms and independent living units.
Given the negative operating pressures on UCH, the fact that the renovations to be financed by the debt issuance are a key element in improving UCH's operations, the size of the debt issuance, and the expected increase in MADS, a downgrade within the next two years may be warranted depending on the final details of the bond issuance and UCH's success in improving operations. A turnaround plan is in its final stages of approval by senior management at UCH. A 2009 budget has yet to be released.
Headquartered in Marion, Ohio, UCH owns and operates nine nursing, continuing care retirement and multi-level facilities in various sites in Ohio and Indiana. In addition, UCH owns and operates approximately 50 HUD housing projects. Fitch notes that UCH does not covenant to provide financial disclosure to bondholders, which is viewed negatively. However, UCH does provide good financial disclosure to Fitch, providing annual audited financial statements and quarterly un-audited financial statements complete with a management discussion and analysis, cash flow statement and occupancy data.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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, New York
Gary Sokolow, +1-212-908-9186
Jim Mitchell, +1-813-222-1395 (Tampa)
Cindy Stoller, +1-212-908-0526 (Media Relations)
