Fitch Rates Asbury Maryland Obligated Group's (MD) 2009A&B Revs 'BBB-'; Affirms Outstanding

2009-11-20 18:02:05 -

Fitch Ratings has assigned an unenhanced 'BBB-' rating on approximately $60.2 million of City of Gaithersburg, Maryland economic development revenue bonds (Asbury Maryland Obligated Group Issue) series 2009A and economic development revenue refunding bonds (Asbury Maryland Obligated Group Issue) series 2009B. Fitch also affirms the 'BBB-' rating on all outstanding parity debt.

The Rating Outlook is Stable.

Series 2009A proceeds will be

used to finance project costs associated with an expansion project at the Asbury Methodist Village campus, fund a debt service reserve, and pay a portion of associated costs of issuance.

Series 2009B proceeds will be used to refund the outstanding series 2006B and C bonds and pay a portion of the costs of issuance. The series 2009A bonds are expected to be privately placed and the series 2009B bonds sold via negotiation in early December. Both series of bonds are expected to be issued in a fixed rate mode.

The affirmation of the 'BBB-' is supported by sound occupancy at the Maryland Obligated Group despite the recessionary effects, solid demand for the Asbury Methodist Village (AMV) and Asbury-Solomons Island (A-S) product, and continued profitability from core operations. For the nine months ended Sept. 30, 2009, the combined occupancy of AMV and A-S was 92.3% in independent living units (ILUs), 93.6% in assisted living units (ALUs), and 97.1% in skilled nursing facilities (SNFs). Furthermore, the demand for AMV's product remains strong as demonstrated by 74% (17 of 23 units) of the to-be-built Phase I Courtyard Villas pre-sold with a 10% deposit. The occupancy levels in the ILUs at both properties did drop below historical levels in the later part of 2008 and early 2009.
However, Fitch notes that management responded quickly by implementing focused marketing initiatives that effectively stymied the declining utilization. These stabilized occupancy levels through Sept. 30, 2009 along with focused cost containment initiatives have combined to produce solid net income from operations for the interim period of $5.44 million.

Credit concerns for the Maryland Obligated Group have centered on the up-streaming of cash reserves to the parent company Asbury Communities, and the associated exposure to the Pennsylvania Obligated Group due to the corporate structure. Fitch noted a decline in cash reserves since 2006, mostly attributable to a combined transfer of nearly $33 million from 2006 through 2007. Those transfers have declined since the start of fiscal 2008 and were estimated to be $4.02 million through Sept. 30, 2009 (a transfer out of $6.16 million in FY08 and a transfer in of $2.14 million YTD FY09). Coupled with the recessionary downturn in the global investment markets, liquidity measures declined in fiscal 2008 to 129 days cash on hand from 220 in fiscal 2007, yet have rebounded to 151 days through the interim period.

The Maryland Obligated Group has two swap contracts outstanding with Lehman Brothers. A basis swap is active for an aggregate $29.5 million that is currently (as of Sept. 30, 2009) valued with a negative mark towards the Maryland Obligated Group of $660 thousand. The second $73 million swap is a forward starting swap with an execution date of 2013 that is valued with a negative mark of $9.44 million. Neither swap requires collateral postings. The Maryland Obligated Group is meeting its obligations for payment on the basis swap, and both swap agreements remain in full force and effect notwithstanding the pending Lehman bankruptcy cases. Although the aggregate negative mark is substantial, Fitch does not anticipate these will have a negative credit effect because of the lack of collateral posting requirements. However, if these swaps were to be terminated at a significant loss, there may be negative credit implications without commensurate mitigants.

The Stable Outlook assumes continued sound operating performance at both the Maryland and Pennsylvania Obligated Groups. Positive rating pressure may occur if occupancy levels that are at or above historical and median levels lead to strong operating results that serve to materially strengthen the Maryland Obligated group's balance sheet position.

Negative rating pressure may occur if persistent recessionary pressures result in softer occupancy that drag operating results or sustained investment losses that combine to weaken the balance sheet. Significant financial deterioration at either Obligated Group could pressure the rating on the Maryland Obligated Group bonds given the history of transfers from the Maryland OG to the parent company, Asbury Communities. The Maryland Obligated Group consists of Asbury Methodist Village and Asbury-Solomons. The Maryland Group operates a total of 1,095 ILUs, 157 ALUs and 313 SNFs. In 2008, the Maryland Group had total operating revenues of $83.4 million.

The Maryland Obligated Group has covenanted to provide annual audits and quarterly unaudited financial information through EMMA. Disclosure to Fitch has been very good to date with quarterly disclosure that includes detailed financial statements (less cash flow statement), utilization statistics, and a brief management discussion and analysis section.

Further, management has been very approachable and accessible to Fitch during periodic reviews.

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Fitch RatingsAnthony A. Houston, +1-312-368-3180 (Chicago)Jim
Mitchell, +1-813-222-1395 (Tampa)Media Relations:Cindy
Stoller, +1-212-908-0526 (New York) cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com