CHICAGO Moody’s Investors Service assigned a negative outlook to the Catholic Archdiocese of Chicago’s A1 rating due to operating losses and other fiscal pressures that range from a spike last year in sexual misconduct settlements to uncollectible local parish loans and rising cemetery maintenance liabilities.
Moody’s affirmed the rating and revised the outlook from stable Tuesday as the archdiocese -- through the Catholic Bishop of Chicago -- may privately place up to $65 million of senior unsecured notes with a closing date next month. Moody’s first assigned a public rating to the CBC last year ahead of a private placement. The CBC would have about $150 million of rated debt after the transaction.
The Catholic Bishop of Chicago is the obligor and issuer. The notes represent an unsecured general obligation of the CBC with the designated group primarily responsible for repayment made up of the Archdiocese of Chicago Pastoral Center and Catholic Cemeteries.
Proceeds will reimburse the CBC for prior capital expenses, to finance future costs, and to fund reserves. Investors in such transactions often request a public rating. If sold, the new notes would be placed with a limited number of qualified institutional buyers and accredited investors.
Moody’s said the outlook change on the archdiocese, one of the nation’s largest dating back to 1843, 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.”
The archdiocese’s history of sexual misconduct claims poses not only an near-term burden on its books but creates long-term uncertainty over future litigation and settlement amounts. The archdiocese self-insures for claims.
The archdiocese has paid out $119 million in sexual abuse settlements mostly involving clergy since 1986, with the amount spiking in fiscal 2012 to $19 million. The archdiocese anticipates payments of $5 million to $6 million in fiscal 2013, a figure more in line with previous years.
“The archdiocese’s policies and procedures and reserves partially mitigate the risks associated with this litigation,” Moody’s said, while also warning that “sustained elevated settlement amounts could pressure the CBC’s reserves and could result in a downgrade.”
The archdiocese -- led by Cardinal Francis George since 1997-- also remains at risk, like many not-for-profits, for economic trends that may hurt local parish collections, fundraising, or sales of pre-burial services at its cemeteries.
The CBC recorded a 3% operating deficit on a $325 million operating base in fiscal 2012. The Archdiocese Pastoral Center has adopted a plan to resolve deficits by 2015.
The designated group’s total net assets declined by about $190 million between 2011 and 2012. The decline, however, was due primarily to a change in its discount rate for determining future cemetery maintenance costs which increased the necessary reserve.
“As a result of this change, the designated group’s financial resources look considerably weaker, although cash and investments remain strong,” Moody’s said. Analysts also warned that the rise in loans to local parishes that are written off underscores the “unsustainable nature of the current pastoral center operating model.”
The Archdiocese’s ample cash and investments in relation to its debt level, broad membership base, disciplined governance and management and relatively stable fundraising support the rating at its current level. The designated group maintains over $800 million in cash and investments. Analysts also praised the archdiocese’s strong governance and “well-articulated” three year plan to improve operations.
Moody’s also praised as a positive the archdiocese’s diverse leadership that includes lay persons in addition to religious leaders, exemplary planning, active financial oversight of parishes, and active risk management of sexual misconduct litigation.
The archdiocese has 2.2 million members in its 356 parishes, accounting for 37% of the region’s population, and operates the nation’s largest Catholic cemetery system with 46 cemeteries, and the nation’s largest Catholic educational system. Its real estate holdings are also expansive and considered a credit strength with an estimated market value of $155 million.
The archdiocese has recently launched a $350 million fundraising campaign with the aim of raising $200 million for the archdiocese and $150 million for the parishes. The CBC’s adherence to canon law, which requires repayment of debt and obligations and prohibits default, is also considered a credit strength.