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Rating Action:

Moody's downgrades Philadelphia Corporation for the Aging (PA) to Baa2; outlook revised to negative

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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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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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