OREANDA-NEWS. January 27, 2016.  Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Franciscan Communities, Inc.:

--\\$100.3 million Illinois Finance Authority (IL) (Franciscan Communities, Inc.) revenue bonds, series 2013A;
--\\$40.1 million Illinois Finance Authority (IL) (Franciscan Communities, Inc.) revenue refunding bonds, series 2007A;
--\\$3.0 million Illinois Finance Authority (IL) (Franciscan Communities, Inc.) revenue bonds (EXTRAS), series 2004B;
--\\$5.2 million Cuyahoga County (OH) (Franciscan Communities, Inc. - Mount Alverna Project) health care facilities revenue bonds, series 2004C;
--\\$2.7 million Cuyahoga County (OH) (Franciscan Communities, Inc. - Mount Alverna Project) health care facilities revenue bonds (EXTRAS), series 2004D.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a pledge of gross revenues from the Franciscan Communities, Inc., Obligated Group (FCOG), a mortgage interest in owned and leased property of FCOG and a debt service reserve fund on the series 2013A bonds.

KEY RATING DRIVERS

IMPROVING TREND IN PERFORMANCE: FCOG financial performance has strengthened over the last two years driven largely by improved IL occupancy at Franciscan Village (FV), its largest entrance fee community. FCOG's 91.6% operating ratio, 16.3% net operating margin - adjusted, and 1.9x maximum annual debt service (MADS) coverage In FY15 (June 30 year end) were the strongest results through the four year historical period.

LARGE, DIVERSE REVENUE BASE: Fitch believes FCOG's sizable operating platform for a senior living provider supports its stable credit profile. FCOG had \\$122.8 million in operating revenue in FY15 and has approximately 1,900 units in service, located across eight campuses in three different states. No single campus in the system accounts for more than 20% of FCOG's operating revenues. Fitch believes this diversity allows for one campus to struggle or undergo major capital projects without heavily impacting the total system performance. In addition, the diversity of sites and states, enables FCOG to mitigate some of the risk of Medicaid, with the majority of FCOG's Medicaid revenues coming from outside of IL, which reimburses Medicaid at a low rate and has been slow in paying.

STRONG REVENUE ONLY COVERAGE: An additional credit strength is FCOG's revenue only coverage, which was 1.7x in fiscal 2015 and has averaged 1.5x over the last four audited years, relative to Fitch's 'BBB' median of 0.9x. FCOG's debt burden is manageable as indicated by MADS as a percent of revenue of 9.6% at Sept. 30, 2015, which is also better than Fitch's 'BBB' median of 12.4%.

ADEQUATE LIQUIDITY: FCOG's unrestricted cash and investments have steadily grown over the last four audited years, but still trail category medians. FCOG continues to upstream funds to its parent corporation (\\$4 million in FY2015), which has restrained liquidity growth. At Sept. 30, 2015, FCOG had 238 days cash on hand, a 6.1x cushion ration, and 41.5% cash to debt.

CAPITAL SPENDING TO CONTINUE: FCOG has materially increased its capital spending over the last three years. With this cycle of capital spending, FCOG has addressed much of the deferred maintenance across its campuses. In addition, FCOG has assessed market opportunities at several campuses, and market analyses are in process at several other campuses, with a focus on longer term growth opportunities. Fitch expects that projects emerging from these studies will begin to be pursued over the next year to five years but believes FCOG should be able to fund these projects, including potential debt issuances, at the current rating level.

RATING SENSITIVITIES

NEAR-TERM STABILITY: Fitch expects Franciscan Communities Obligated Group's (FCOG) performance to remain stable, with revenue only coverage at 1.5x or higher. A sustained period of lower operating performance or a sizable debt issue that stresses FCOG's manageable debt load could result in negative rating pressure.

LONGER TERM POSITIVE MOMENTUM: Over the medium term, should FCOG be able to fund its capital program, maintain MADS coverage (including entrance fees) near 2x, and grow its balance sheet to figures closer to the medians, there could be positive rating pressure. Growth in liquidity is needed to offset Fitch's concerns regarding FCOG's large skilled nursing service line and related exposure to government payors, especially at the higher rating level.

CREDIT PROFILE
FCOG is composed of eight senior living communities located in Illinois, Indiana and Ohio, with a total of 733 ILUs, 407 assisted living (AL)sheltered care and dementia units and 775 SNFs. Fitch uses the audits financial results of the FCOG for analysis.

Stable Financial Profile
FCOG has very consistent operating profile with most of its financial ratios fairly stable over the four year historical period. FCOG's operating ratio has ranged from 91.6% to 93.1% over this time, which is better than the category median of 96.1%. MADS coverage (including entrance fees) averaged 1.8x over this time, relative to a median of 2x. Three month interim results show performance remaining stable.

Supporting the financial performance has been an improving trend in IL occupancy, which stood at 92% at Sept. 30, 2015, relative to 84% IL occupancy in FY2013. Assisted living and dementia occupancy and skilled nursing occupancy have remained solid as well throughout the historical period.

Governance Update

Over the last year, FCOG sole corporate member, Franciscan Sisters of Chicago Service Corporation (FSCSC), added a tenth board member, a financial professional. Fitch notes the marked improvement in governance structure since Fitch first rated FCOG in 2013. At that time, FSCSC had only six board members and very little professional diversity on the board. FCOG had only three members and these were appointed by and were members of the FSCSC board. Fitch believed the small size of the board and lack of professional diversity were credit concerns, given the challenges of operating such a large and complex organization, including the entities outside the OG.

Fitch notes positively that FSCSC has begun to address the issue at the parent level with the increase to 10 board members. However, the FCOG board structure has not changed.

Debt Structure/Capital Spending
At Sept. 30, 2015, FCOG had \\$174.7 million in long-term debt. FCOG's debt structure is conservative at 85% fixed rate bonds. The remaining 15% of variable rate debt includes a privately placed taxable loan for \\$10.7 million and a loan from The Huntington National Bank for \\$15.7 million. The \\$10.7 million taxable loan has a stated due date of Jan. 5, 2023. The variable rate and bank debt exposure are not credit concerns given that it represents a small portion of FCOG's debt, and FCOG has a strong liquidity position relative to the debt. It has no swaps.

After period of deferred capital spending, with FCOG's capital spending averaging a low 24.8% of depreciation for the audited years 2010-2012, FCOG has been spending much more on capital, with a focus on the FV campus. An IL renovation project completed at FV has had a positive impact on IL occupancy and financial results. In addition, FCOG recently completed the renovation of the AL unit and added 51 new AL units, including 14 memory care units. A skilled nursing project is underway and expected to completed within the next year. Fitch expects this cycle of capital spending to continue. FCOG is exploring a number of projects across its system, with a focus on growth opportunities, and Fitch expects FCOG to begin to undertake these projects in the one year to five year timeframe.

FCOG has some debt capacity at the current rating level, but the current rating does not factor in additional debt. Fitch will review any potential debt issuance and its impact on the rating closer to issuance. However, FCOG has flexibility on the timing of the projects, and the Stable Outlook reflects Fitch's belief that any additional debt within the next rating cycle would be manageable for FCOG.

Disclosure
Franciscan expects to release annual audited financial statements and utilization statistics within 150 days after each fiscal year end and quarterly unaudited financial statements and utilization statistics within 45 days of each quarter end.