Nov 29 - Fitch Ratings has assigned a 'BBB-' rating on the following St.
Louis County Industrial Development Authority bonds, issued on behalf of
Friendship Village of West County (d/b/a Friendship Village of Chesterfield,
--$23.3 million revenue bonds, series 2012;
The series 2012 bonds will be used to finance various capital projects,
reimburse FVC for prior expenditures, fund a debt service reserve, fund
capitalized interest, and pay costs of issuance. The bonds are expected to price
the week of Dec. 10.
In addition, Fitch downgrades the following St. Louis County Industrial
Development Authority bonds to 'BBB-' from 'BBB':
--$22.4 million hospital revenue bonds, series 2007A.
The Rating Outlook is Stable.
The bonds are supported by a pledge of revenues, mortgage, and debt service
KEY RATING DRIVERS
DEBT STRESSES FINANCIAL PROFILE: The issuance of an additional $23 million in
debt brings many of FVC's related metrics well below Fitch's 'BBB' category
medians. Pro-forma maximum annual debt service increases to $3.2 million from
$2.3 million and represents a very high 21.4% of total 2012 revenues. Historical
pro-forma MADS coverage in 2012 was light at 1.2 times(x) against Fitch's 'BBB'
category median of 1.8x.
ILU EXPANSION PROJECT: The new debt will help finance a 30-unit independent
living unit (ILU) expansion, an assisted living expansion as well as campus
renovations which Fitch believes will help keep FVC competitive in its service
area. Construction is expected to begin in January 2013 and fill-up to begin in
February 2014. The units were 53% presold as of Nov. 26, 2012.
IMPROVED 2012 CASH FLOW: FVC generated $3.6 million of net turnover entrance
fees in fiscal 2012 compared to $1.1 million in fiscal 2011 and $1.5 million in
fiscal 2010. Net operating margin-adjusted was 25.3% in fiscal 2012, which
represented a twofold improvement over the prior two years and exceeded the
'BBB' category median of 20.3%. FVC will need to maintain this level of strong
cash flow generation and robust turnover entrance fee receipts to cover its
increased debt service requirements.
SOLID OCCUPANCY: Independent living unit (ILU) occupancy has averaged above 93%
since 2007, and remained steady at 92% through the three month interim period
ended Sept. 30, 2012. Health center occupancy was steady at 98% in fiscal 2012
and retained the same through Sept. 30, 2012, ahead of a low 85% at fiscal
LIGHT LIQUIDITY: FVC's liquidity was steady at Sept. 30, 2012, with $12.4
million in unrestricted cash which equates to an adequate 313 days of cash on
hand (DCOH). However, pro-forma cash to debt and cushion ratios at Sept. 30th of
3.9x and 25.6%, respectively are weak compared to the 'BBB' category medians of
6.6x and 50.9%. Fitch expects FVC's capital plans will limit significant
liquidity growth over the next few years; however material erosion is not
The downgrade to 'BBB-' reflects the impact of the additional $23 million in
debt which will double FVC's debt burden to a total of $45 million and bring
many of FVC's debt-related metrics to well below Fitch's 'BBB' category medians.
FVC is not counterparty to any derivatives and its debt is 100% fixed rate.
Fitch believes the ILU expansion and campus renovation will help FVC remain
competitive within a service area which includes several communities. The
30-unit expansion will feature larger more desirable units, and FVC expects to
reach its 75% presale target by January, 2013. Fitch notes that FVC remains the
only true Type 'A' lifecare product within its western St. Louis metro service
area, which is a differentiating factor to residents. FVC management has a
robust marketing program in place focused on the financial advantages of the
Type 'A' contract.
Though FVC's cash flow was steady through fiscal 2012, the three-month interim
period had negative net entrance fee receipts due to the timing of optional
refund payments. FVC's net adjusted operating margin was negative -12.5%, and
its MADS coverage was negative -0.1%. On a rolling 12-month basis (coverage
covenant under the MTI) FVC produced 0.9x MADS and 1.5x actual coverage. FVC's
reliance on entrance fees for its debt service coverage is of some credit
concern, though it is not atypical for a Type 'A' community.
FVC maintains a steady cash position, and has never carried a liability for
future healthcare services on its balance sheet. Including the $1.6 million in
reimbursement, FVC is expected to have 353 DCOH and 29% cash to debt at bond
closing. Unrestricted cash and investments is projected to remain within
category levels; projected at $13.3 million in fiscal 2013 and improving
The Stable Outlook reflects Fitch's expectation that FVC will produce steady
cash flow and turnover entrance fees to cover its increased debt service
requirements through stabilization in 2015. While projected coverage of MADS in
2013 and 2014 is thin at 1.2x and 1.4x, respectively, projected coverage of
actual debt service (reflecting capitalized interest) is adequate at 1.4x and
2.0x in 2013 and 2014. At the current rating level, FVC has little room for
negative variance on projected financial performance and project development and
failure to produce projected debt service coverage could lead to further
negative rating pressure.
Friendship Village of West County (d/b/a Friendship Village of Chesterfield) is
a Type-A continuing care retirement community with 282 ILUs, 22 residential care
beds and 99 skilled nursing beds located in Chesterfield, MO. Total revenues in
fiscal 2012 were $15.6 million, as calculated by Fitch.
FVC will covenant to provide both annual disclosure (within 150 days) and
quarterly disclosure (within 45 days) to bondholders, including both financial
and occupancy data. FVC has consistently provided Fitch with routine disclosure
and good access to management.
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.
In addition to the information cited in Fitch's 'Revenue-Supported Rating
Criteria', this rating action was informed by information provided by Cain
Brothers as underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities