WASHINGTON - Continuing care retirement communities face more rating downgrades than upgrades in 2009 because of limited access to capital, slower unit re-occupancy caused by falling real estate values, and significantly reduced liquidity due to losses on investments, Fitch Ratings said yesterday.

The effects of these pressures is likely to spur more negative rating pressure overall during the next 18 to 24 months, Fitch said in its report, which revised the industry outlook to negative from stable.

"We are expecting downgrades to exceed upgrades," analyst Jim Mitchell said during a conference call yesterday. "In each year, affirmations have been the most common rating action ... but given all the pressures, we do expect more negative rating pressure on credits into 2010."

This will follow the trend last year when there was an increase in downgrades of CCRCs. Last year Fitch downgraded three credits, revised outlooks to negative on two, and put two on negative watch for downgrade.

The prior year, the sector experienced more positive rating actions by Fitch with three upgrades and two revisions to positive outlooks.

At the top of the list of credit concerns that will likely affect CCRCs is the sector's limited access to capital and letters of credit, Fitch analyst James LeBuhn said during the call.

In addition, the availability of LOC capacity for CCRCs may be "crowded out" by increased demand from the acute care sector, which is converting its auction-rate securities as bond insurance has essentially disappeared, LeBuhn said. The rating agency also is concerned that if current LOCs are not renewed and access to the fixed-rate bond market remains limited, the cost of capital to CCRC providers could increase to levels not seen in 15 to 20 years, according to LeBuhn.

"Those LOC renewals will be much more expensive," he said.

The combination of credit markets "grinding to a halt" and the high cost of capital could force CCRCs to use cash reserves to fund necessary projects, which could hurt their liquidity levels, the rating agency said.

Fitch projected that CCRCs throughout the year will continue to have trouble accessing credit, which will push down deal volume to levels not seen since the late 1990s.

CCRC bond issuance fell last year to a par amount of $2.4 billion, compared with the $7.5 billion in 2007, according to Thomson Reuters. CCRCs completed 78 deals last year versus 191 deals in 2007, Fitch said.

Access to traditional fixed-rate debt was virtually unavailable for the CCRC sector in the last four months of 2008, Fitch said.

Cash flows, which historically have been a strength in the sector, will diminish this year because investment returns will be lower and units will have a slower turnover rate, resulting in weakened debt service coverage and liquidity levels, according to the report.

Liquidity in fiscal 2009 and 2010 will likely suffer because many facilities are experiencing significant losses on investments, Fitch said.

However, a "silver lining" for many CCRCs is that the weak job market has begun to reduce employee turnover rates and limit wage pressures, which could alleviate some of the other pressures that they face, LeBuhn told those on the conference call.

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