S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Health Care■ Financing terms that can be more flexible and moresuitable to the specific asset being financed; and■ Legal covenant flexibility.In addition, some entities, especially in seniorliving, are attempting to fund non-recourse projectswith limited support from an obligated entity.While Standard & Poor’s always begins its analysisof the organization as a whole, there are limitedcircumstances where obligated group performancecan be ‘ring-fenced’ from the impact of nonrecoursedebt that in most cases is dilutive to theobligated group. In these cases Standard & Poor’swill review the strategic importance of the nonobligatedentity, the financial relationship betweenthe parties, the scope and depth of managementresources and legal issues. In some case the debt ofthe obligated group can be up to three notcheshigher than the consolidated rating of the organization.This is discussed in more detail in the seniorliving criteria. ■Senior LivingThe majority of rated credits in Standard & Poor’sRatings Services not-for-profit senior living sectorare either single-site continuing care retirementcommunities (CCRCs), or multi-facility organizationswhere CCRCs comprise the majority of theorganization. CCRCs typically offer independent living,assisted living, nursing care, and additional servicesto senior citizens pursuant to a long-termresident contract. These contracts may include paymentof an entrance, or advance fee as well as amonthly maintenance fee. CCRCs appeal to manyelderly people because of the variety of living andservice arrangements available, and the security ofconvenient access to nursing care and other supportservices if, and, as they become needed.The majority of Standard & Poor’s CCRC creditratings are in the ‘BBB’ or ‘A’ categories. Ratingstend to cluster in the lower end of the investmentgradespectrum because of industry-risk factors,including the competitive and fragmented nature ofthe business, the small size of many CCRCs, thediscretionary nature of the services provided, andthe significant demand for capital to update facilitiesin order to attract an increasingly sophisticatedand demanding resident population, resulting ingenerally high leverage and debt burden.Historically, the industry has generally been relianton investment income to offset operating losses andkeep annual price increases to a minimum. In thepast several years, however, the industry as a wholehas focused greater efforts on generating positiveincome from operations, since market volatility canlead to unstable earnings and coverage trends. Thisshift is one of the drivers behind the recent stabilizationof long term care credit ratings.Standard & Poor’s analysts evaluate a CCRC’screditworthiness based on the organizational structure(including whether it is a standalone facility ora multi-site organization), the strength of the organization’sgovernance and management, demonstrateddemand for existing and planned facilities,and the adequacy and predictability of key revenuesources. The mix of private versus governmentalrevenue sources is also relevant to the analysis, asMedicaid and Medicare reimbursement can beunpredictable. Additionally, because of the serviceorientednature of this business, the ability to keeprevenue increases in line with labor and other costsis key to Standard & Poor’s analysis. A strongemphasis is placed on adequate liquidity, to meetoperating and debt-service costs, as well as futurecapital needs and future service liabilities if theorganization offers life care contracts. In addition,the service offerings, location, and the conditionand attractiveness of the physical facilities are comparedwith those offered by other competitors inthe service area, as well as the merits of the proposedproject and financing. Financial performanceis evaluated, including the use of ratio analysis, todetermine the ability of the organization to meetoperating costs and existing and planned fixed-capitalcosts. The annual ratio report for CCRCsexplains our ratios in detail. Future capital plans, aswell as potential projects at affiliated organizations,are also considered.Organizational StructureSystem ratings generally are higher than ratings forsingle-site facilities because of the financial andnonfinancial synergies and the dispersion of riskthat generally accrues to systems. Standard &Poor’s approach to rating senior living systems issimilar to that used for single-site facilities. In bothcases, creditworthiness depends on certain qualitative,quantitative, and legal factors. However, a162 Standard & Poor’s Public Finance Criteria 2007