Fitch affirms BBB+ rating for Diakon Lutheran Social Ministries bonds; outlook stable

New York, N.Y. (Monday May 22, 2017)

Fitch Ratings of New York has affirmed its BBB+ rating of bonds issued on behalf of Diakon Lutheran Social Ministries, with a financial outlook of “stable.”

“We are very pleased with the continuation of our rating,” says Mark T. Pile, president/CEO of Diakon, “which provides external validation of our fiscal strength. We believe that Fitch continues to recognize how well Diakon develops plans and then successfully executes them.”

According to Fitch’s media release, the affirmation reflects Diakon’s 2016 94.5% operating ratio and a 16.7%, net operating margin-adjusted. “The results were consistent and even slightly better than in 2015, and represent a material improvement over 2014, when Diakon produced a 99.4% operating ratio and a 9.7% net operating margin-adjusted,” the release indicates. “These results have led to stronger debt service coverage over the last two years.”

Fitch notes that the “improved performance has been driven by a combination of revenue-enhancement initiatives and good expense management. On the revenue side, capital investments and revamped marketing efforts have led to an impressive improvement in IL [independent senior living] occupancy. IL occupancy has been steadily growing since it was in the low 80% range in 2012 and stood at 92% at March 31, 2017.”

First-quarter 2017 results “show Diakon’s performance remaining consistent,” the release continues.

The Fitch review and ratings relate to a $35,000,000 revenue bonds series of 2016 and also to the following bonds previously issued on behalf of Diakon, all through the Cumberland County Municipal Authority:

  • $145,550,000 revenue bonds series of 2015
  • $9,260,000 bonds series 2009.

The most recent bonds were issued as fixed-rate debt, says Scott Habecker, chief operating officer and chief financial officer, to refund previous bonds, finance capital expenditures and pay for a swap termination and the cost of issuing the new bonds. “That issue took advantage of then-low rates in the fixed- rate debt markets, reduced risks associated with existing variable-rate debt, and provided an overall debt structure that is more predictable and conservative.”

That debt structure is approximately 83% fixed-rate bonds and 17% variable-rate bonds, with Fitch viewing “the level of variable-rate debt and bank exposure as manageable,” according to the release. “Diakon has no swaps.”

The Fitch statement also references the 2014 creation of a separate corporation—known as Diakon Child, Family & Community Ministries—for the organization’s services for children, youths, families and adult individuals. The change resulted in an organizational structure more closely aligned with the types of entities traditionally having bond debt.

“The decision to move the social service programs into their own subsidiary was strategic and designed to position the programs better operationally. The move has been successful with the social service programs showing a positive operating margin in aggregate for the first time in 2016,” Fitch notes in its release.

“The report also cited continued improvement in Diakon’s skilled nursing census, operational strengths, adequate liquidity and geographic diversity and size as also prompting its positive ratings.

For further information, please contact:
William Swanger, M.A., APR
Senior Vice President, Corporate Communications
Diakon Lutheran Social Ministries
(717) 795-0308