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Rating Action:

Moody's revises outlook of Archdiocese of New Orleans (LA) to negative; affirms Baa1

31 Jan 2019

New York, January 31, 2019 -- Moody's Investors Service has revised the outlook of the Archdiocese of New Orleans (LA) to negative from stable. We have also affirmed the archdiocese's (ANO) Baa1 on $39 million Series 2017 Revenue Refunding Bonds issued through the Louisiana Public Facilities Authority.

RATINGS RATIONALE

The outlook revision to negative reflects rising risk associated with new sexual misconduct claims combined with still thin operating performance. The outlook revision also reflects contingent risks associated with other related enterprise activities, notably a senior living facility, St. Anthony's Gardens (SAG), for which the Archdiocese has guaranteed debt and currently not meeting occupancy targets. After settling nearly all of the six claims outstanding since 2016, following disclosure of misconduct in other Catholic dioceses in the nation, new misconduct claims were made against the archdiocese and priests in fiscal 2018. ANO recorded a $8.5 million reserve for misconduct claims, resulting in the failure to meet its debt service coverage covenant for fiscal 2018. Not an event of default, ANO was required to and did engage a consultant to conduct a review and make recommendations to Chancery management. The timing of resolution and ultimate impact of these new claims remains uncertain.

Affirmation of ANO's Baa1 reflects its very good unrestricted liquidity and its strong market position as Louisiana's only archdiocese, and the nation's second oldest, with large and growing membership. Favorably incorporated is ANO's strengthening centralized financial oversight by the Archbishop and the Administrative Office (Chancery). This resulted in improved operating cash flow and debt service coverage in fiscal 2018 following three years when operating cash flow, as calculated by Moody's, did not fully cover debt service. Also favorably factored is that Canon law requires repayment of debt and obligations. Credit challenges include vulnerability to litigation risk, as seen in the new claims, as well as contingent risks of parishes or other organizations in the Archdiocese. ANO also has a high debt burden relative to its diocesan operations reflected in debt-to-revenues of 1.6x. Despite the improvement in 2018, debt service coverage from cash flow remains weak, with a small revenue base subject to operating volatility and growing pension obligations and contributions.

RATING OUTLOOK

The negative outlook reflects the uncertain impact on the archdiocese's cash and investments from either settlement of current sexual misconduct claims or the emergence of a new claims that can materially reduce financial reserves. It also reflects still thin operating performance and potential calls on operations from other parish activities.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Substantial growth in balance sheet resources relative to debt and operations, with sustained, consistent improvement in operations

FACTORS THAT COULD LEAD TO A DOWNGRADE

- New sexual misconduct claims or reduction in liquidity and balance sheet reserves from settlements or support of other parish activities, including St. Anthony's Gardens

- Failure to meet covenants in fiscal 2019

- Sustained reduction in cash and investments and liquidity

- Sustained weaker operations and cash flow generation, resulting in weaker debt service coverage

LEGAL SECURITY

The Series 2017 bonds are a general unsecured obligation of the archdiocese, payable from gross revenues, ANO's general fund and other legally available funds. A debt service reserve fund is not anticipated at the time of issuance, but is required if the liquidity covenant falls below 1.0x.

The bonds have three financial covenants. For the debt calculations, ANO is required to include 20% of debt of St. Anthony's Gardens, a recently opened senior living facility with currently $50 million of debt guaranteed by ANO. There is a 1.1 x liquidity covenant and for fiscal 2018 ANO reported 3.1x. The Net Worth covenant is at least 1.0x and ANO reported 3.6x. The Debt Service Coverage Ratio is at least 1.0x and ANO reported a negative 0.32x due to the $8.5 million reserve charge.

ANO's guarantee of SAG debt is currently 100% of debt service. The guarantee drops to 35% when: 1) the project is completed; 2) reaches a 1.25x debt service coverage for the immediately preceding year; and 3) has over 120 days cash on hand. The guarantee is eliminated when debt service coverage of 1.4x or better is achieved. Once the guarantee is reduced or eliminated, it cannot be restored. Currently, SAG is covering operating expenses and partially covering interest payments, with ANO contributing the remaining debt service.

PROFILE

Archdiocese of New Orleans, the second oldest archdiocese in the country, currently operates in the eight civil parishes in the metropolitan New Orleans area. With over 517,000 parishioners, the archdiocese consists of 112 parishes, supports and administers 80 schools with over 35,000 students, and sponsors other facilities including 3 nursing homes and 21 affordable living facilities.

METHODOLOGY

The principal methodology used in this rating was Not-for-Profit Organizations (other than Healthcare and Education) published in June 2017. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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.

Diane Viacava
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Susan Fitzgerald
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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