Fitch Upgrades Immanuel, NE's Revs to 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded to 'AA' from 'AA-' the rating on the following bonds issued on behalf of the Immanuel Obligated Group:

--$36,430,000 series 2010 Hospital Authority No. 1 of Lancaster County, NE;

--$6,130,000 series 2010 Hospital Authority No. 1 of Sarpy County, NE;

--$18,630,000 series 2010 Hospital Authority No. 2 of Douglas County, NE.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group members, a first mortgage on each of Immanuel's five communities, and a fully funded debt service reserve fund.

KEY RATING DRIVERS

OUTSIZED LIQUIDITY DRIVES 'AA' UPGRADE: The obligated group (OG) of Immanuel had $446.2 million in unrestricted cash and investments at Dec. 31, 2014, which equated to 5,848 days cash on hand, an 80.2x pro forma cushion ratio, 629.9% cash-to-debt, and 13.3x available funds-to-expenses. Further supporting the upgrade is the OG's steady operational performance and strong coverage, with coverage at 4.4x in FY2014 (June 30 year-end) and 6.3x in the six-month FY2015 interim period.

CONSISTENTLY HIGH OCCUPANCY: Immanuel's occupancy has been consistently around 95% in independent living (IL) and assisted living (AL) through the historical period. In the nine-month fiscal 2015 interim period occupancy was 93% in IL and 94.4% in AL.

FINISHING EXPANSION PROJECT: Immanuel is close to finishing its expansion which includes six cottages, 14 IL apartments, and 24 AL units. The project is being funded by a $17 million debt issuance. The six cottages have been built and filled, and the rest of the projects are expected to come on line in June.

WEAKER CONSOLIDATED OPERATING RESULTS: Immanuel's consolidated financial ratios were diluted in FY2014 due mostly to costs related to three PACE programs, which are outside the OG and in various start-up stages. However, the concerns about the weaker consolidated performance are mitigated by available resources outside the OG, including $25 million set aside to support the PACE programs, and Fitch's expectation that the PACE programs will reach positive cash flow as they continue to mature and to increase enrollment. Immanuel is about half way towards its enrollment stabilization figure.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT FINANCIAL POSITION: The 'AA' rating assumes that the OG's unrestricted liquidity will remain at or near current levels and that the OG operating performance will remain stable. Material changes to either could pressure the rating.

PROJECTS OUTSIDE OG: Immanuel is pursuing and contemplating a variety of strategic initiatives that are consistent with its mission. The majority of these, especially the potentially higher risk ones, are expected to occur outside the OG. However, Fitch will continue to monitor activities outside the OG and their potential impact on the OG as these initiatives move forward.

CREDIT PROFILE

The Immanuel OG operates five Type C facilities in Omaha and Lincoln, Nebraska, with a total of 422 ILUs, 149 ALUs and 26 memory care beds. Total revenues for the consolidated system in fiscal 2014 were $40.5 million.

Fitch reports on both the consolidated and OG performance, but bases its rating on the financial position of the OG. Fitch analyzes the non-OG activities and performance in light of their potential impact on the OG's financial position.

Currently, Fitch believes the resources exist outside the OG to fund the projects Immanuel is pursuing outside the OG, and that management has a sound strategy for them. Fitch believes that the PACE program, which is the largest drain on the consolidated performance, will be cash flow positive over the medium term, so it is not a credit concern.

In addition, Immanuel purchased two skilled nursing facilities from Catholic Health Initiatives (CHI) for approximately $12 million in 2014. The purchase funds came from equity outside the OG. The two facilities are running a slight negative operating margin, but Fitch believes Immanuel can improve operations at these two sites.

Liquidity Drives Upgrade

The upgrade to 'AA' from 'AA-' reflects the continued strength of Immanuel's liquidity and the further clarification regarding Immanuel's investment strategy and strategic focus since Fitch's last rating action.

At the time of the last rating action in 2013, Immanuel had recently received approximately $500 million, after resigning its membership in Alegent Creighton Health (ACH), which is the largest not-for-profit, faith-based healthcare provider in Nebraska and southwest Iowa. CHI, which was the other member of ACH, became the sole member of ACH at that time.

The $500 million in funds had a significant impact on Immanuel's credit profile, and as a result, in 2013, Fitch upgraded Immanuel's rating to 'AA-' from 'A-'. However, at the time, Immanuel was still determining how to manage the funds, which were sitting in cash on its balance sheet, and was making key programmatic decisions on the use of the funds, for initiatives both inside and outside the OG.

Since that rating action, Immanuel has established a new investment policy that states the goals of its investment strategy, outlines the responsibilities of the board and management, uses the expertise of investment professionals, and lays out target allocations. The investment policy meets Fitch's expectations for the rating level, and Fitch believes the target allocations, which are roughly 25% fixed income, 50% equities, and 25% alternatives, are reasonable for both the rating level and Immanuel's liquidity needs.

Additionally, since the last rating, Immanuel moved approximately $125 million of funds outside the OG for various programs, including to support past and future PACE expansion ($25 million), for the acquisition and operation of long-term care facilities ($25 million) and a philanthropic fund for support of the local community ($50 million). This was in line with Fitch's expectations on the size of the funds that were to be moved outside the OG, as well as their use.

Going forward, given the limitations on the disposition of assets per the OG's Master Trust Indenture, Immanuel is limited in its ability to move a sizable amount of funds to outside the OG.

The current upgrade factors in the added stability of the funds inside the OG, the investment policy that is now in place, and the clarity regarding the funds and programs outside the OG, all of which further strengthen the strong liquidity position.

CAPITAL/DEBT UPDATE

Immanuel is close to finishing an expansion project at Pacific Spring Village that includes six cottages, 14 IL apartments, and 24 AL units. The six cottages have been built and filled, and the rest of the projects are expected to come on line by June.

Immanuel issued $17 million of bonds in 2014 to fund the project. The bonds are structured as tender bonds and have an initial 10-year tender period. The interest rate is fixed at 2.95%, and Immanuel is able to draw down the funds as it incurs project expenses. Fitch was not asked to rate the bonds. MADS increases to $5.6 million from $4.6 million, but Immanuel is paying interest only until 2017. Pro forma MADS coverage remained strong at 5.1x in the FY2015 six-month interim period.

At Dec. 31, 2014, Immanuel had approximately $70.8 million in total long-term debt, including approximately $12 million of the drawn-down 2014 bonds. All of Immanuel's debt is fixed rate and Immanuel has no swaps.

Disclosure

Immanuel discloses quarterly statements within 60 days of each quarter end that includes a balance sheet, income statement, and cash flow statement and audited financial statements within 120 days of fiscal year-end.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related research:

--Revenue-Supported Rating Criteria, June 16, 2014

--Rating Guidelines for Nonprofit Continuing Care Retirement Communities, July 24, 2014

--U.S. Nonprofit Institutions Rating Criteria, May 29, 2014.

Applicable Criteria and Related Research:

U.S. Nonprofit Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749100

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984895

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Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1 212-908-9186
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10014
or
Secondary Analyst
Michael Burger
Director
+1 212-908-0555
or
Committee Chairperson
Eva Thein
Senior Director
+1 212-908-0674
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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