Standard & Poor's Ratings Services said it lowered its long-term rating and underlying rating to BBB-minus from BBB on the Pennsylvania Economic Development Financing Authority's $15.59 million series 2000 and $4.63 million series 2002 bonds, issued for Dr. Gertrude A. Barber Center Inc.
At the same time, Standard & Poor's lowered its AA/A-1 rating to AA-minus/A-1 on the Barber Center's series 2002 bonds based on the application of joint criteria assuming medium correlation.
"The lower rating reflects our view of the Barber Center's financial metrics, which weakened substantially in fiscal 2012, reflecting credit risks indicative of a 'BBB-' rating," said Standard & Poor's credit analyst Avani Parikh. "Since our last review, the Barber Center experienced significant, although unexpected, cuts in state reimbursement that affected its fiscal 2012 operations, resulting in a large operating loss and very weak debt service coverage," said Parikh.
In Standard & Poor's view, the Barber Center was quick to respond to these pressures and implemented a detailed cost-reduction plan, which will likely offset some of the revenue losses and stabilize operating performance, although management projects that results for the next few years are likely to remain below historical levels. The cuts also resulted in certain covenant violations but management engaged a consultant and obtained waivers, ensuring that an event of default did not occur.
The BBB-minus ratings reflect Standard & Poor's view of the Barber Center's: healthy liquidity position as of June 30, 2012;status as the largest provider of services for children and adults with intellectual disabilities and autism in Erie County, Pa., since 1952; solid demand for services; and a proactive management team that has responded quickly to unexpected challenges.
Partly offsetting credit factors include Barber Center's: operating loss of $3.5 million (negative 5.4% margin) for the year ended June 30, 2012 (based on draft audit results), although consolidated results through the first quarter of fiscal 2013 reflect a much smaller loss of $448,000 (negative 2.8% margin); very weak 0.2x coverage of maximum annual debt service (MADS) for fiscal 2012, following coverage ranging between 2x to 3x for the previous two audited fiscal years; and continued vulnerability to changes in reimbursement due to the highly concentrated revenue stream from governmental sources within Pennsylvania, which, like many states, is facing budgetary pressures.
In Standard & Poor's view, the BBB-minus rating level provides some flexibility for the Barber Center to continue to navigate the operating pressures and reimbursement challenges. Standard & Poor's does not believe a higher rating is likely within the two-year outlook period due to the center's current operating challenges. Standard & Poor's could consider a lower rating or negative outlook within the two-year outlook period if the Barber Center's operating margin does not show improvement and if coverage continues to remain below 1x.