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25 Apr 2014
Action affects $18M of rated debt
New York, April 25, 2014 -- Moody's Investors Service has downgraded the Philadelphia Corporation
for the Aging's Series 2001A (taxable) and 2001B (tax-exempt)
ratings to Baa2 from Baa1. The rating action affects $18
million of debt issued through the Philadelphia Authority for Industrial
Development. The outlook is revised to negative from stable.
SUMMARY RATING RATIONALE
The downgrade to Baa2 reflects the Philadelphia Corporation for the Aging's
decline in already limited liquidity, deterioration of extremely
thin cash flow in FY 2013, and modifications in reimbursement process
for a certain program that resulted in higher receivables and highlighted
the institution's vulnerability to program changes given low resources.
The negative outlook reflects the potential for additional liquidity pressure
due to more elevated receivables related to the reimbursement modification.
The outlook also incorporates the possibility of funding cuts or delays
related to budgetary pressure at the Commonwealth of Pennsylvania (Aa2
stable).
The Baa2 rating reflects the organization's role as Philadelphia's
Area Agency on Aging, providing services to low income seniors according
to federal legislation. Additional strengths include expense flexibility
and guaranteed funding in the form of a block grant from the Commonwealth
of Pennsylvania for more than 60% of existing revenue. PCA's
thin liquidity, anaemic cash flow, and concentration of funding
sources also factor into the rating.
CHALLENGES
*Thin and narrowing liquidity provides limited flexibility to withstand
delayed reimbursements, higher receivables, or sudden funding
cuts. Unrestricted cash and investments that could be liquidated
within one month covered a low 40 days of operating expenses at June 30,
2013.
*PCA's breakeven operating margin means that the organization
has consistently produced thin cash flow of around 4%. Cash
flow narrowed to a very low 2% in FY 2013 due to revenue declines,
though still provided sufficient 1.2 times debt service coverage.
*High leverage relative to operations and resources. Though
debt is amortizing, there are limited prospects to reduce the debt
burden significantly given declining reserves and revenues. Expendable
financial resources provided a very thin 0.1 times coverage of
debt in FY 2013.
*Highly concentrated funding sources, with more than 90%
of funds from the commonwealth or federal government, exposes PCA
to budgetary and political changes.
STRENGTHS
*Vital purpose as a provider of social and medical services to low-income
senior citizens in the Philadelphia area.
*Flexible expenses allow PCA to adjust quickly to changes in funding.
In FY 2013, PCA cut expenses by 5% in FY 2013 in response
to a change in funding for one program.
*Over 60% of PCA's FY 2013 budget is protected by a state
legislative hold harmless clause requiring the state to provide a block
grant at least equal to the prior year's allocation.
*Mortgage security and debt service reserve provide additional bond
security. The mortgage security is on the PCA's headquarters
located on North Broad Street in Philadelphia.
Outlook
The negative outlook reflects PCA's liquidity and operating vulnerability
due to reimbursement delays and additional governmental funding pressure.
WHAT COULD MAKE THE RATING GO UP
Sustained improvement in operating cash flow to cover debt service coverage
and facilitate the rebuilding of liquidity, combined with demonstrated
ability to operate under the new reimbursement funding mechanism could
result in upward rating momentum.
WHAT COULD MAKE THE RATING GO DOWN
Deterioration of liquidity due to continued deficit operations or delayed
payments, insufficient cash flow to cover debt service, or
terms and conditions in new external facility that would take priority
to bondholders could pressure the rating.
RATING METHODOLOGY
The principal methodology used in this rating was Not-for-Profit
Organizations (other than Healthcare and Education) published in March
2014. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
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Emily Schwarz
Asst Vice President - Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Karen L Kedem
Vice President - Senior Analyst
Public Finance Group
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Moody's downgrades Philadelphia Corporation for the Aging (PA) to Baa2; outlook revised to negative
No Related Data.
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