OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on bonds issued on behalf of Christian Homes, Inc., IL (CHI). See the full list of rating actions at the end of this release.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a pledge of gross revenues, first lien mortgage and security interest in the facilities, and a debt service reserve fund.

KEY RATING DRIVERS

STABLE FINANCIAL PERFORMANCE: Through the nine month-interim - ended March 31, 2015, CHI reported an operating ratio of 90.7% and a net operating margin of 12.4%, which is consistent with historical performance.

STABLE OCCUPANCY; MAJORITY SKILLED NURSING: Occupancy improved or remained stable year over year across CHI's independent living (IL), assisted living (AL), and skilled nursing (SNF) service lines, with an improvement in ALU occupancy to 80% from 76% in the year prior. CHI revenue is driven heavily by skilled nursing with approximately 80% of 2014 revenue derived from more than 1,600 beds.

STRATEGIC DIVESTITURES: Fitch views positively CHI's divestitures in 2013 and 2014 of properties in Chrisman, IL, and Bensenville, IL. The divestures remove two unprofitable campuses from CHI's portfolio, lessen its exposure to the state of Illinois, and reduces the debt of the obligated group.

LOW LEVERAGE: With the divestitures, CHI's maximum annual debt service (MADS) has dropped to \$8.1 million from \$10.6 million. The lower MADS equates to a light 6.2% of annualized 2015 revenues, comparing favorably to the 'BBB' category median of 12.3%.

GEOGRAPHIC DIVERSITY OFFSETS THIN LIQUIDITY: Geographic diversity across four states helps mitigate concerns regarding CHI's light liquidity metrics. At March 31, 2015, CHI had \$44 million in unrestricted cash and investments which equated to 140 days cash on hand, a 5.4x cushion ratio, and 41.5% cash-to-debt, all below the category medians.

RATING SENSITIVITIES

ADDITIONAL DEBT: Management is considering executing a bank loan of approximately \$13 million to finance various capital projects in the coming year. While Fitch believes CHI has debt capacity for the contemplated borrowing, the final size, amortization and loan terms could pressure the rating.

CREDIT PROFILE

CHI is a large senior living system that operates facilities in four states: Illinois, Indiana, Iowa and Missouri. In fiscal 2014, CHI had \$106 million in total operating revenue net of discontinued business lines. The rating and analysis are based on the CHI obligated group, which as of March 31, 2015, consisted of 10 facilities, with 370 ILUs, 262 ALUs and 1,192 nursing care beds.

CONTINUED STRONG OPERATING PERFORMANCE

CHI's operations over the past four years have been strong, with an average operating ratio of 92.7% and an average net operating margin of 11.4%, compared to Fitch's respective 'BBB' category medians of 97.4% and 9.2%. This level of performance has been sustained through the nine-month interim, with a 90.7% operating ratio and a 12.4% net operating margin as of March 31, 2015.

STRATEGIC DIVESTITURE & EXPANSION INITIATIVES

CHI sold its Bensenville, IL, facility in December 2014 for \$23 million, consisting of 140 ILUs, 42 ALs and 222 SNF units. The facility's occupancy was poor, with 72% occupancy in its SNU and 37% in its AL. The operating loss attributable to the facility in 2014 was \$1.9 million. CHI booked a net impairment of \$3.5 million in 2014 as a result of the sale. This sale follows on the 2013 sale of its Chrisman, IL property for \$1.2 million realized gain. CHI used a portion of the Bensenville sale proceeds to redeem debt associated with the facility.

The sale of the two campuses reflects CHI's strategy to focus on its better performing campuses as well as to reduce its concentration of facilities in Illinois. Fitch views positively CHI's continued efforts to pursue revenue-enhancing strategies across its system, with a focus on diversifying its service lines, revenue streams, and geographic locations. Currently, 73% of SN beds are in Illinois.

CHI is adding 12 ALUs and 20 short-term rehabilitation units to an original facility in Lincoln, IL, and 21 short-stay rehabilitation units in Springfield, IL. These projects are expected to be funded with a \$13 million bank loan. Management is contemplating additional expansion capital plans. Fitch views favorably CHI's continued measured expansion efforts, and believes that CHI has the capacity to absorb the currently contemplated additional debt. Material deviation from the planned issuance may pressure the rating.

CHI has developed an arrangement to lease its Indiana facilities from the respective county in order to maximize state-level reimbursement. This relationship began in fiscal 2013 and is reflected as a reduction in patient service revenue, which fell to \$126.1 million from \$133.2 million in fiscal 2012, as the amounts CHI receives comes in the form of supplemental payments. CHI management reports that the bottom line reimbursement it now receives, net of the lease payments, has improved in Indiana as a result of this program.

THIN LIQUIDITY BOLSTERED BY SALES

Liquidity remains thin but has improved because of CHI's divestiture of the two properties. Absolute cash was \$44 million as of March 31, 2015, consistent with prior years. Days cash on hand has been bolstered in the interim by a reduction in operating expenses associated with the two strategic divestitures, at 140 days from 123 days in the prior-year nine-month interim. Further, CHI's redemption of \$22 million in series 2007A and 2010 bonds associated with the Bensenville, IL divestiture is reflected in an uptick in cash-to-debt to 51.9% from 30.9% in 2013.

LOW DEBT BURDEN; ADDITIONAL DEBT PLANNED

CHI's MADS as a percentage of revenue is low at 6.2% at March 31, 2015, below Fitch's 'BBB' category median of 12.3%. CHI's debt-to-net available, at 4.0x, was also better than Fitch's category median of 6.3x. Both of these reflect CHI's manageable debt burden and viewed by Fitch as a credit strength at the current rating level.

Debt service coverage has remained stable. Historical coverage of MADS was roughly 1.8x to 1.9x between 2011 and 2013 based on MADS of \$10.6 million, which represents debt service prior to the partial redemption of series 2007A and 2010. MADS is now estimated at \$8.1 million, which translated to robust historical pro forma coverage of 2.3 to 2.4x.

Coverage in 2014 is in line with historical coverage at 1.8x, and was healthier through the nine months ended March 31, 2015: revenue-only coverage was a healthy 2.5x.

MADS includes CHI's corporate debt, which CHI issued from its corporate offices in the 1990s. The corporate debt, which is a general obligation and is subordinate to the master trust indenture debt, is taxable and variable rate. The interest rate resets every three or five years, and the interest rates have generally been around 5.5%.

Fitch notes positively that CHI continues to redeem extra principal on the corporate debt, and the outstanding principal is currently at \$23 million, down from \$40 million when Fitch first rated CHI in 2010. Additionally, CHI's debt service calculation for covenant compliance includes the extra principal that CHI pays down during the year. This provides a measure of financial flexibility, as CHI could reduce the extra payments it is making should it have a challenging operating year.

Total outstanding long-term debt at March 31, 2015, was approximately \$85 million. CHI maintains a \$15 million line of credit, which could be used for any potential puts of the corporate debt, and no amounts are currently drawn. The line of credit is secured under the MTI.

CHI is planning an additional \$13 million construction loan in 2015 with First Midwest Bank (rated by Fitch 'BBB-'/Stable Outlook), which is expected to be variable rate for a 10-year term, interest-only through 2017, and on parity with outstanding bonds. Financial and reporting covenants are not expected to be more restrictive than under the MTI.

Debt will be approximately 38% variable rate, assuming full draw and assuming no further redemption of corporate general obligation debt. Fitch does not expect that MADS will be materially influenced by this issuance.

DISCLOSURE

CHI disclosure requirements under its bond documents include the submission of annual audited statements within 150 days of fiscal year-end and quarterly unaudited statements within 45 days of quarter-end to the Municipal Securities Rulemaking Board's EMMA system.

AFFIRMED BONDS

--\$15,590,000 Illinois Finance Authority (Christian Homes, Inc. Obligated Group Project), revenue refunding bonds, series 2010;
--\$19,810,000 Illinois Finance Authority revenue refunding bonds, series 2007A;
--\$6,395,000 City of Crown Point, Indiana revenue refunding bonds, series 2007D;
--\$7,425,000 County of Pottawattamie, Iowa revenue refunding bonds, series 2007E;
--\$11,045,000 Industrial Development Authority of the City of Joplin, Missouri revenue refunding bonds, series 2007F.