Fitch Affirms Immanuel Retirement Community (NE) Bonds at 'A-'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed the underlying rating on approximately $33.1 million of Hospital Authority No. 1 of Lancaster County, Nebraska variable-rate health facilities revenue bonds (Immanuel Health Systems - Williamsburg Project) series 2000A, and $5.4 million Hospital Authority No. 1 of Sarpy County, Nebraska, variable-rate health facilities revenue bonds (Immanuel Health Systems - Trinity Village Project) series 2000B. Both series of bonds were issued on behalf of Immanuel Retirement Communities and Immanuel Health Systems, Inc. Obligated Group (IHS). Fitch was not asked to provide enhanced ratings on these bonds, which are supported by letters of credit from Allied Irish Bank, N.A. The Rating Outlook is Stable.

The affirmation is supported by IHS' strong occupancy levels, sizable cash reserves, affiliation with Alegent Health, and limited competition. Over the last three fiscal years (ended June 30, 2009) occupancy in the 557 independent living units (ILUs) and 242 assisted living units (ALUs) has been very strong, ranging from 96%-98%. IHS has been able to maintain a high level of occupancy even as it has expanded, adding 40 ILUs and three ALUs in 2008 and 40 additional ILUs and 21 ALUs in 2009. Further, IHS maintains a strong demand for its product given the limited competition in the service area, as demonstrated by the waitlist of 241 people for the ILUs and 77 for the ALUs as of Aug. 31, 2009. Despite seeing a decline in unrestricted cash and investments to $42.6 million at fiscal year end, compared to $48.1 million in the prior year, IHS maintains strong liquidity relative to expenses of 752 days cash on hand. Lastly, IHS maintains a 50% co-sponsorship with Catholic Health Initiatives (rated 'AA' by Fitch) of Alegent Health System, which is comprised of nine acute care hospitals, more than 100 service sites, and over 1,200 physicians on its medical staff. IHS receives substantial referrals from Alegent and benefits from its affiliation with the system.

Main credit concerns include negative bottom line operating performance, a high debt burden, variable-rate demand debt exposure and relatively weak debt service coverage. IHS relies on investment income to keep monthly service fees at a moderate level and offset operating losses. After narrowing the excess income loss to $905,000 in fiscal 2008 (negative 3.7% excess margin), fiscal 2009 reversed the course due to $3.8 million in realized investment losses, which combined with the operating losses for a bottom line of approximately negative $7.7 million (negative 40.9% excess margin). The debt burden remains elevated as indicated by maximum annual debt service (MADS) as a percentage of revenue of 21.7% for fiscal 2009. The debt burden remains high relative to liquidity as well, as demonstrated by 10.4 times (x) cushion ratio and 77% cash to debt, which are below the 'A' category medians of 15.1x and 114%, respectively. Management's choice to maintain its sizable liquidity position affects these ratios negatively. Of the approximately $57 million in long-term debt, approximately $39 million is in the form of variable-rate demand bonds backed by a letter of credit (LOC) from Allied Irish Bank expiring in April 2011, which exposes IHS to put risk and renewal risk. The time until expiration of the LOC and the ability per the bond documents to convert the rate mode from variable- to a fixed-rate precludes a Negative Outlook at this time. Lastly, it should be noted that IHS did not meet its 1.15x debt service coverage ratio covenant for fiscal 2009 due to the realized investment losses. Management is currently in talks with various parties and expects to secure a waiver for the breach.

The Stable Outlook reflects Fitch's belief that IHS will continue to demonstrate strong occupancy levels and maintain adequate liquidity. Fitch notes that downward rating pressure would likely ensue if IHS is unable to successfully extend the LOC or convert to a fixed-rate mode associated with its current variable-rate demand bonds.

IHS operates five Type C facilities in Omaha and Lincoln, Nebraska, with a total of 557 ILUs and 242 ALUs. Under the series 1997 bonds, IHS is only required to disclose annual audited financial statements and utilization data within 120 days of each fiscal year end to the Master Trustee.

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