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

Middletown, Pa. (Wednesday June 1, 2016)

Among bond-related capital projects is construction of independent-living homes at Twining Village, Holland, Pennsylvania.

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

While the report represents the ratings agency’s annual review of bonds issued in 2015 and 2009, it also similarly rated the planned 2016 issuance of $35 million of Cumberland County Municipal Authority bonds. Those 2016 bonds are expected to be priced the week of June 6, with closing by the end of June.

“We are extremely pleased with this rating,” says Mark T. Pile, president/CEO of Diakon, “which provides external validation of the steps we have taken to ensure a sound financial underpinning for Diakon’s senior living sevices operations.”

The series 2016 bonds will be issued as fixed-rate debt, notes Scott Habecker, chief operating office and chief financial officer, with bond proceeds used to refund 2014B bonds, fund capital expenditures and pay for a swap termination and the cost of issuing the new bonds.

“We planned this bond issue,” Habecker says, “to take advantage of low rates in the fixed- rate debt markets, reduce risks associated with our existing variable-rate debt, remove certain uncertainties related to our existing interest rate swaps and provide an overall debt structure that we believe is more predictable and conservative.”

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

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

According to Fitch’s press release, the affirmation reflects the fact “Diakon’s financial results have been on a positive trajectory driven by improved performance at its core entrance-fee campuses and helped by the moving of social service programs outside of the [obligated group].” 

The statement references the 2014 creation of a separate corporation—known as Diakon Child, Family & Community Ministries—for the organization’s many 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. 

“In 2015, Diakon [Lutheran Social Ministries]’s operating ratio of 95.5%, its net operating margin, adjusted of 13.7%, and pro forma maximum annual debt service coverage of 2.3x were all the strongest metrics through the four-year historical period. First-quarter 2016 results show a year-over-year improvement for most metrics,” Fitch added in its release. 

The report also cited continued improvement in Diakon’s senior living accommodations, with independent-living occupancy materially improving over the last six years, driven by capital investments, a major repositioning project and enhanced sales efforts. Fitch also cited Diakon’s operational strengths, adequate liquidity and geographic diversity and size as underlying its positive ratings.

“Diakon continues to execute on a number of revenue-enhancing initiatives … [Its]  focus on growing the short-term rehab service line has been successful as well, with Diakon maintaining its patient acuity levels and Medicare census, which remained above 10% in the three-month 2016 interim period,” the Fitch release noted. “While it has slowed down, Diakon’s spending on capital remains strong … The capital spending, which was funded by a combination of bond funds and equity contributions, have supported projects that have improved the marketability of various campuses, as well as funded a system-wide electronic medical record.”

After the new debt is issued, Diakon Lutheran Social Ministries’ debt structure will be conservative, Fitch notes. “On a pro forma basis, the $237 million in long-term debt will be approximately 83% fixed and 17% variable. In 2014, Diakon refinanced much of its letter of credit variable-rate debt with a $41.5 million private placement.” With the new issuance, Diakon will have terminated its two outstanding swaps, creating a more-conservative debt profile, Habecker notes.

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