Fitch Ratings has downgraded to 'BB+' from 'BBB-' the rating on approximately $20 million Illinois Finance Authority revenue bonds (Lutheran Social Services of Illinois Obligated Group LSSI), series 2006. The Rating Outlook is Stable.
The rating downgrade reflects the deterioration in Lutheran Social Services of Illinois (LSSI) Obligated Group's operating profile and its liquidity (both for the obligated group and including the Cornerstone Foundation [Cornerstone]) over the past four fiscal years. Cornerstone Foundation is a non-obligated affiliate that does not directly pledge its cash and investments to bondholders, but does exist solely to support LSSI's mission and is viewed as an additional source of liquidity. At June 30, 2009, LSSI and Cornerstone had combined cash and investments of $19.6 million, which equates to 78 days cash on hand (DCOH), 108% cash to debt, and a 14.3 times (x) cushion ratio. These figures have been on a steady decline since fiscal year 2005, when they stood at 114 DCOH, 188% cash to debt, and 18.5x cushion ratio. Moreover, liquidity for the obligated group has declined by approximately 50% since fiscal 2005, with DCOH at 26, cash to debt at 36% and the cushion ratio at 4.8x, as of June 30, 2009. Liquidity had been a historical strength of LSSI and is a critical factor in LSSI's credit profile, since LSSI not only relies on Cornerstone for balance sheet support but is also dependent on it for annual contributions to cover operating deficits.
In fiscal years 2007 and 2008, LSSI continued to have negative excess margins of -1.9% and -5.6% (adjusted for a one time $6 million gain on the sale of property), respectively, and unaudited results for year-end fiscal 2009 show a -2.8% excess margin. For fiscal years 2007 and 2008, LSSI operational profile showed further weakness as it had two consecutive years of negative cash flow margins. From fiscal 2001 through fiscal 2006, LSSI recorded positive cash flow from operations that averaged approximately $2.1 million per year. While unaudited results show LSSI returning to positive cash flow in fiscal 2009, at approximately $850,000, it is still below the cash flow levels it had earlier in the decade.
Operating pressure has come from the fiscal and political turmoil in the state of Illinois. LSSI receives more than 70% of its funding from the state. On a regular basis, LSSI does not receive timely payments from the state, which puts further pressure on LSSI's balance sheet and forces it to use a $4 million line of credit, on which it pays interest. While LSSI has worked to align revenue with expenses, state program cuts are a growing credit concern. In July 2009, Fitch downgraded the rating on State of Illinois's GO bonds to 'A' from 'AA-'. The 'A' rating was affirmed in September 2009, with Fitch noting the state's credit standing to be negatively affected by its inability to fully address current spending needs and accumulated deficits as well as its structural budget gap. The full press release, Fitch Rates Illinois' $400MM GOs 'A', dated Sept. 15, 2009, is available at www.fitchratings.com.
The Stable Outlook reflects management efforts to better align revenues and expenses since the hiring of a new COO in fiscal 2007. LSSI has consolidated administrative functions and areas, including consolidating four foster care offices into one central office, as well as working to keep staffing flexible to adjust to changes in state contract funding levels. LSSI has a relatively light debt burden as maximum annual debt service ($1.4 million) is 1.9% of revenue. This contributes to manageable fixed costs, and with management working to control variable expenses (salaries and benefits), it helps mitigate program cuts from the state. The Outlook also reflects the solid demand for and essentiality of the services LSSI provides (foster care, mental health, senior services and substance abuse). While these services may face budget cuts, it is unlikely that they will be completely eliminated. Fitch believes that these factors combined with Cornerstone's historical support of LSSI provide stability at the current rating level.
LSSI, headquartered in Des Plaines, IL, is a large, not-for-profit residential and social services provider. Total revenues of the obligated group in fiscal 2008 were approximately $98.4 million. In addition, LSSI has 16 non-obligated affiliates. LSSI covenants to provide audited financial statements within 180 days of each fiscal year-end and quarterly disclosure of the first three fiscal quarters within 90 days.
Additional information is available at www.fitchratings.com.
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Contacts:
Fitch Ratings, New York
Gary Sokolow, +1-212-908-9186
Paul
Rizzo, +1-800-908-5000
or
Brian Bertsch, +1-212-908-0549
(Media Relations)
brian.bertsch@fitchratings.com
Sandro
Scenga, +1-212-908-0278 (Media Relations)
sandro.scenga@fitchratings.com
