Colorado Health Facilities Authority Revenue Debt Rating Outlook Revised To Negative On Lower Occupancy

NEW YORK (S&P Global Ratings) March 27, 2020--S&P Global Ratings revised the one-year outlook on its 'A-(sf)' rating on Colorado Health Facilities Authority's series 2018A-1 improvement and refunding revenue bonds and series 2018A-2 taxable improvement and refunding revenue bonds, issued for Bethesda Foundation, to negative from stable and affirmed the rating.
At the same time, S&P Global Ratings revised the one-year outlook on its 'BBB+(sf)' rating on the authority's series 2018B revenue bonds, issued for Bethesda Foundation's Bethesda project, to negative from stable and affirmed the rating.
The negative one-year outlook reflects S&P Global Ratings' opinion of the deteriorating average occupancy at the project's nine properties to 80% in February 2020 from 87% in fiscal 2018. Management attributes decreasing occupancy to competition among assisted-living facilities, unfinished interior upgrades delaying new tenants moving into facilities, newly hired executive directors at most properties, and more tenants moving out during the winter. While the project has reported strong gross rental income recently, and management will implement cost-containment measures, S&P Global Ratings thinks there is a possibility continued occupancy decreases could pressure net cash flow's ability to meet debt service within the next year.
"Continued decreasing occupancy across project properties could stress operating revenue and pressure the project's ability to meet debt-service payments absent comparable operating expense savings. Furthermore, greater housing competition could threaten to decrease occupancy or increase operating costs, limiting the project's ability to uphold strong debt service coverage, which could lead to our lowering the rating. We could also lower the rating if maintenance or other operating expenses were to increase as facilities strive to maintain a strong physical condition without comparable income growth," said S&P Global Ratings credit analyst David Greenblatt. "Conversely, sustained increased average occupancy, as new executive directors gain traction and marketing efforts prove effective, would demonstrate the project's ability to fill vacant units and offset potential competition while maintaining above-average-quality properties. Increased net cash flow due to higher occupancy or savings due to cost-containment measures could improve the project's ability to cover debt service, which could lead to our revising the outlook to stable."
The rating affects roughly $124.5 million of bonds issued to refinance debt across the foundation's facilities, including properties not owned by the obligated group; pay a Fannie Mae prepayment fee; fund capital improvements and a debt-service-reserve fund; and pay issuance costs.

The series 2018A-1 and 2018A-2 bonds are on parity with each other. The series 2018B bonds are subordinate to the 2018A-1 and 2018A-2 bonds. Bondholders benefit from a debt-service-reserve fund totaling about $912,000 as of February 2020 for the second-tier 2018B bonds. There is no debt-service-reserve fund on the senior-lien bonds.
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