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

Senior LivingLegal CriteriaStandard & Poor’s legal criteria for CCRC financingsare similar to those for health care revenuebond financings. They include:■ A revenue pledge of the CCRC. A mortgage mayalso be offered.■ A fully funded debt service reserve fund at bondclosing.Residents’ and other creditors’ claims to entrancefees should be subordinate to debt-service payments.-Documentation Requirements for CCRCsFactoring Non-Recourse Debt In Senior LivingGrowth strategies in the senior living sector, includingdevelopment of new communities or expansionsand/or redevelopment of existing campuses, representboth an opportunity, and potential added creditstress for rated organizations. Opportunitiesinclude increased risk dispersion, the ability to capitalizeon demographic growth, leverage managementstrength, create revenue diversity and expenseeconomies of scale, and allocate overhead expensesover a larger revenue base. Campus redevelopmentprojects allow organizations to maintain marketabilitythrough offering bigger units, moreDocumentation Requirements for CCRCsThe following documentation is required to complete any credit analysis:■ Three to five years’ audited financial statements, with current and prior-yearunaudited interim statements;■ A sources and uses statement for the bond financing;■ A debt service amortization schedule;■ A description of the obligor, including members of the board of directors andmanagement team, and affiliated organizations;■ A description of the service area, including demographic and economic supportingdata;■ Utilization and payor mix data for major business segments for the past fiveyears and current year budget;■ Current-year financial budget with supporting assumptions;■ Resident contract types and refund policies in effect for CCRCs; and■ History of advance fees and maintenance fees for CCRCs and/or room rates fornursing home services.The following additional documents are needed to complete a public rating:■ A preliminary official statement;■ A three-year financial forecast with related assumptions for project financing;■ Legal documents;■ The latest actuary’s report;■ The past two years’ auditor’s management letter comments,with management’s response; and■ For new credits, a site visit, including a management meeting and tour.amenities, such as fitness centers, or a wider rangeof services including Alzheimer’s care. Additionally,there are a significant number of senior livingorganizations that were built thirty or more yearsago, which require major reconstruction in order tomeet expectations of today’s seniors. Typically, suchprojects are funded primarily with debt, so managementmust balance the potential long-term benefitof the projects with the near-term construction andfinancial risk and potential rating impact of theadditional debt.The capital-intensive structure of most developmentstypically requires the issuance of a relativelylarge amount of debt, potentially creating financialstress. Long-term debt increases the financial risk ofthe organization in the near-term by straining theincome statement with increased debt service, andincreasing leverage on the balance sheet.Standard & Poor’s looks at existing “in-groundcoverage” as one important measure of financialimpact—-whether the existing organization can paythe full amount of the new total maximum annualdebt service (as well as its existing debt service)without the benefit of new project revenues, in casethe project experiences significant delays in constructionor fill-up, prolonged start-up losses, or inrare cases, project failure. With projects that producenew units, the cash and revenue payoff is usuallyanticipated three-to-five years out, soStandard & Poor’s views this as a period of crucialrisk. Once the facility achieves stabilized occupancy(typically 90%), the organization has a significantincrease in liquidity from the entry fees receivedupon fill-up, and may use some of this cash to paydown a large portion of the project-related debt—inmany cases, this is a scheduled pay down that ispart of the original plan of finance.When developing or acquiring a new facility, anorganization can leverage the credit strength of therated entity by issuing new project debt as part ofthe existing obligated group. However, many seniorliving organizations do not believe that ‘start-uprisk’ of a new project should be borne by residentsof existing facilities. Additionally, as a practicalmatter, many credits are not strong enough to successfullyhandle the costs and risks of a majordevelopment project without negatively impactingtheir current rating. In order to protect residents ofexisting facilities, as well as protecting their creditstrength, some organizations segregate new projectsfrom the rated entity (typically an existing obligatedgroup), by issuing debt through non-obligated subsidiaries,or through non-recourse ventures. In addition,a number of senior living organizations areadopting a range of covenants and organizationalstructures aimed at protecting, or “ring-fencing”the rated entity.www.standardandpoors.com165