Fitch Downgrades Lutheran Social Services Obligated Group, IL Revs to 'BB+'; Outlook Stable

NEW YORK--(Business Wire)--
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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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

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