Canton II Inc., TX Bond Ratings Lowered To 'BBB-(sf)' And 'BB(sf)' On Rapidly Declining Performance

CENTENNIAL (S&P Global Ratings) Aug. 16, 2019--S&P Global Ratings lowered its rating on Bexar County Housing Finance Corp., Texas' series 2011 A (class I) senior housing revenue bonds to 'BBB-(sf)' from 'A-(sf)', and its rating on the corporation's subordinate 2011 B (class II) bonds to 'BB(sf)' from 'BBB-(sf)'. The bonds were issued by Bexar County Housing Finance Corp. on behalf of the borrower, Canton II Inc., for its Inn at Los Patios apartment's project. The outlook for both ratings is negative.
The downgrade reflects our opinion on the following:
  • Very high competition in the San Antonio senior housing market that has pressured management to offer discounted rents due to increasing vacancy levels;
  • Declining occupancy rates across the project's 167 units, averaging 89% over the past three years, which contributed to its 4.8% decline in effective gross income in fiscal 2018 from fiscal 2017;
  • A significant decline in the project's S&P debt service coverage (DSC) ratio, calculated using S&P net cash flow (NCF) and divided by maximum annual debt service (MADS), to 1.15x from 1.35x for class A and to 0.99x from 1.17x for class B in fiscal 2018 from fiscal 2017, respectively;
  • A weak and very weak loss coverage assessment for class A and B, respectively, indicating a high likelihood that the project may not be able to cover debt service should net revenue or liquidity shortfalls occur;
  • A high S&P loan-to-value (LTV) of 112.70% based on a 9.25% cap rate and the project's three-year average S&P calculated NCF of approximately $2.1 million; and
  • An ownership entity that has experienced the emergence of unexpected operational risks that routinely affects cash flows across the portfolio.
"The negative outlook reflects our view that the project will continue to struggle financially as a result of increasing competition in the assisted living market that is further depressing occupancy levels and exerting pressure to reduce rents," said S&P Global Ratings credit analyst Joanie Monaghan. "Consequently, it is our opinion that the project's three-year average DSC will drop further as net cash flows continue to shrink. In addition, there are near-term liquidity concerns as surplus and operating/maintenance funds are depleted and may not be replenished from excess net cash flow in the near-term. The project has relied heavily on these reserves to cover operating expenses and their declining levels is seen as a credit risk."
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