OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following Maryland Health and Higher Educational Facilities Authority bonds, issued on behalf of Charlestown Community Inc. (Charlestown Retirement Community; CRC):

--$91.4 million revenue bonds, series 2016A.

The bonds are being issued as fixed-rate. Together with $55 million in direct placement debt, they will be used to refund the series 2010 bonds outstanding, fund capital expenditures, and pay costs of issuance. The series 2016A bonds are expected to price on or around the week of Oct. 17.

In addition, Fitch affirms the following rating:

--$117.9 million revenue bonds, series 2010 at 'A'.

The Rating Outlook is Stable.

SECURITY

The series 2016 bonds are expected to be secured by a pledge of gross receipts, and a mortgage on the CRC facility. The series 2010 bonds are additionally secured by a debt service reserve.

KEY RATING DRIVERS

MANAGEABLE PRO FORMA PROFILE: With the net addition of $25 million and move to a 38% variable (underlying) debt mix, CRC's pro forma profile remains unfavorable to the 'A' median. While pro forma maximum annual debt service (MADS) will remain largely unchanged at 9.2% of revenue, debt/net available increases to approximately 5.6x (based on 2015), against Fitch's respective 'A' category medians of 9.2% and 4.3x. Fitch notes that no additional debt is planned, and CRC produced 1.9x coverage of MADS through July 31, 2016.

CAMPUS PROJECT PROGRESSING: As expected, CRC is continuing work on additional phases of its campus project, which will total approximately $75 million through 2020. Approximately $30 million has already been spent, and $25 million in new money will help financing the remainder. Projects include new assisted living (ALU) and skilled nursing (SNF) buildings, replacing the existing health care facility, in stages through 2020.

BALANCE SHEET STRAINED: CRC's liquidity remains sufficient for the rating, despite erosion due to capital spending. With $103.2 million in unrestricted cash at July 31, 2016, CRC had 461 days cash on hand (DCOH) and an 11.2x cushion ratio, versus Fitch's 'A' category medians of 681 DCOH and 18.5x. However, as a Type-C community the level of liquidity is consistent with the rating.

HEALTHY OCCUPANCY: CRC's solid occupancy remains a consistent credit strength. Through July 2016, occupancy was 97.6% in independent living (ILU) and 93.3% within the SNF. In addition, CRC's 35 new memory-care units (MCUs) were 94.6% occupied at July 31, 2016.

RATING SENSITIVITIES

IMPACT OF FUTURE CAPITAL: Charlestown Retirement Community is progressing with its $75 million, five-year campus transformation, which Fitch believes they can absorb at the 'A' rating level with coverage remaining at or above current levels. However, given expected pressure on liquidity against outlays, preservation of cash flow and coverage will be critical to preserve the rating.

CREDIT PROFILE

CRC is located on a 110-acre site in Catonsville, MD, less than 10 miles west of Baltimore. CRC is a type-C continuing care retirement community (CCRC) with 1,461 ILUs, 125 ALUs, 35 MCUs and 174 SNF beds available. CRC is the largest single-site not-for-profit CCRC in the 2015 LeadingAge Ziegler 150, and it had total revenues of approximately $95 million in 2015.

CAPITAL PLANS

CRC is undertaking a five-year, $75 million healthcare repositioning plan, which will entail replacing its existing health care buildings in a phased project through 2020. The project will be funded via internal equity and approximately $25 million in series 2016C bond proceeds. CRC has already spent approximately $30 million through the seven-month interim ended July 31, 2016 on the project.

The campus repositioning is expected to address some unit configuration and mix issues, supporting an increase in MCUs as well as address ALU capacity challenges. While equity contributions are likely to strain CRC's balance sheet through the five-year projection period, steady cash flow is expected to preserve coverage at or above current levels going forward.

LIQUIDITY PRESSURE

CRC's balance sheet is expected to show some strain as a result of the planned equity contributions toward the project. Liquidity already declined in 2015 and into 2016 due to the approximately $30 million spend thus far. While the $25 million in new money debt will be used as reimbursement for prior project expenditures, additional equity spending is likely to pressure liquidity through the project period. Fitch notes that as a Type-C community, CRC's liquidity profile is not inconsistent with its Type-C peers; there is no future health care service liability requiring surplus liquidity to offset as is the case with Type A contracts.

DEBT PROFILE

CRC is issuing a total $146 million in series 2016 debt, including $91.4 million in series 2016A fixed-rate bonds, and $54.8 million in series 2016B and 2016C direct placement bonds. Post issuance, these will be the only bonds outstanding as the series 2016A and 2016B will be used to refinance the existing series 2010 fixed-rate bonds for present value savings. CRCs debt mix will move to 38% variable-rate (series 2016B and 2016C) from 100% fixed-rate, which Fitch believes is manageable.

The direct placement debt is expected to be variable-rate, with financial covenants that are consistent with bond covenants so long as CRC maintains at least a 'BBB-' rating.

Pro Forma MADS is estimated at $9.2 million, up from prior MADS of $9.04 million. Amortization is not level, increasing incrementally year-over-year from $7.4 million in 2018 to a high $9.2 million in 2041 before maturity in 2045. Per Fitch's calculation, CRC covered pro forma MADS at 1.9x at July 31, 2016, with 1.1x coverage by revenue only. Per its covenant calculation, at July 31, 2016 debt service coverage was 2.6x (rolling 12 months) and DCOH was 496.

CRC will execute two floating-to-fixed swaps in conjunction with the series 2016 issuance, with a total $55 million notional value. The swaps will be used to synthetically fix the series 2016B and 2016C bonds.