CHICAGO – The Catholic Archdiocese of Chicago -- once beset with operating losses and pressured by a spike in sexual misconduct settlements and uncollectible local parish loans – has turned a fiscal corner.
Moody's Investors Service late Friday revised its outlook to stable from negative on the archdiocese, which issues debt as the Catholic Bishop of Chicago. The rating agency affirmed the A1 rating that was initially assigned in 2012 on privately placed unsecured senior notes issued to repay loans and fund construction projects, and reserves.
The rating applies to about $150 million of notes.
"The revision of the outlook to stable reflects CBC's restoration of pastoral center operations to general fiscal balance, with improved cashflow for fiscal year fiscal 2016 from carefully managed expenses, and at least stable performance for the current fiscal year 2017," Moody's wrote.
The negative outlook was placed on the rating in 2013 and was "driven by weakened operating performance and the substantial increase in liabilities over the last two years that have depressed the CBC's balance sheet." In addition to misconduct claims and parish costs, the archdiocese was burdened by rising cemetery maintenance liabilities.
The CBC launched a three-year effort to cut costs and launched a fundraising campaign and school closures.
In its fresh report, Moody's said the rating reflects the CBC's robust cash and investments, strong governance and management practices, its standing as one of the nation's largest archdioceses and history of strong philanthropic support. The rating incorporates an expected $75 million debt increase under a bank liquidity facility.
The CBC remains challenged by the factors that initially drove its outlook to negative. The CBC faces the need for continued action on parish and school closures or mergers to respond to changing demographics and membership and the future financial impact of existing and potential future misconduct claims is unknown. Somewhat volatile operations due in part to changing revenues from parish collections and from cemetery sales of pre-burial services also pose challenges.
The stable outlook reflects the expectation of continued stable operations and cash flow, that reserves mostly hold steady, and that no additional debt is taken on besides the bank facility. "The outlook also assumes no significant increase in misconduct claims or settlement costs from current expectations," analysts wrote.
The Series 2012 and 2013 notes are a general obligation of the CBC with the designated group primarily responsible for repayment being the Archdiocese of Chicago Pastoral Center and Catholic Cemeteries although the CBC can access other funds as available to meet debt service on the notes. There is a debt service reserve fund equal to one year of payments for each series, totaling $11.5 million.
The notes contain three financial covenants. A debt service coverage test of at least 1.2 times of annual debt service must be met with coverage at 4.3 times as of September 30, 2016. The designated group must meet a minimum threshold of 2.25 times of unrestricted cash and investments to total indebtedness and total indebtedness of the designated group and less than 45% of total indebtedness plus unrestricted cash and investments of the designated group. The September 30 calculations were at 3.8 times and 21%, respectively.
The bank liquidity facility is supported by a real estate proceeds account held by an administrator. During a three-year drawdown period, CBC must deposit into the account proceeds of real estate sales up to the $75 million facility amount. Withdrawals from the real estate fund are only permitted to repay the 2012 and 2013 notes, the balance under the bank facility, or to pay misconduct claims.
On the maturity date of the bank facility, the funds in the account will be used to prepay the outstanding principal and accrued interest. In the event of a default, the funds in the account will be distributed on a pro rata basis to holders of the banks providing the facility and holders of its 2012 and 2013 notes, Moody's reported. Canon law requires repayment of debt and obligations, with default not permitted.
The Archdiocese of Chicago is one of six dioceses in Illinois and one of the largest of the 195 dioceses in the nation with more than 2.2 million members. It includes 346 parishes, four seminaries, and 46 cemeteries. Its school system includes 193 elementary schools and 36 high schools with enrollment of over 79,000 students in fall 2016. The archdiocese was led by Cardinal Francis George between 1997 and 2014. Cardinal Blasé Cupich is the current leader.