CCRC Bond Ratings Explained

We occasionally get questions about how continuing care retirement communities (CCRCs or “life plan communities”) obtain their bond ratings and what these ratings mean. At a time when the financial viability of CCRCs is an increasingly important component of the consumer’s decision process, it may be helpful to cover some details regarding CCRC bond ratings.

Although there are several bond rating agencies, the main two that rate bonds issued by CCRCs are Fitch Ratings and Standard & Poor’s (S&P Global). It’s difficult to find a full list of all CCRCs rated by either of these organizations without having login access to their respective websites, but you can always ask a CCRC if they have bonds rated by either organization. If so, they should be able to provide additional details about their rating, including whether they have had a recent upgrade or downgrade to their rating.

What to look for with a CCRC bond rating

All bond ratings fall under one of two categories: investment grade and speculative (non-investment grade).

Investment grade bonds indicate a stronger financial outlook and are generally the only quality eligible for purchase by large institutions such as banks or insurance companies. CCRCs that have the cash flow to meet demand without taking on too much debt have a good chance of acquiring an investment grade rating.

Speculative bonds, often referred to as high-yield bonds, carry additional risk relative to investment grade bonds. As an aside, there is still a place for high-yield bonds among investors who are willing to take a little more risk. These investors are compensated for the additional risk by receiving higher yields on the bonds.

The ratings scales for S&P and Fitch Ratings are the same, with investment grade ratings ranging from AAA (strongest) to BBB, and speculative ratings ranging from BB and down to D. You also may find that some of these rating have an accompanying plus or minus sign, which, according to Fitch Ratings, indicates “relative differences of probability of default or recovery for issues.”

Start-up vs. mature CCRCs

Since start-up CCRCs do not have historical data and a record of forecasted demand that would be required to achieve an investment grade rating, debt associated with these organizations will nearly always be nonrated. Down the road, a start-up CCRC may choose to have its bonds rated, particularly if it issues additional bonds to fund an expansion or if it undergoes debt refinancing.

Does this mean that any CCRC with nonrated debt has a higher risk profile, regardless of how long it’s been operating? Not exactly, and investors buy nonrated bonds all the time. In some cases, a smaller CCRC may not feel the expense of obtaining a bond rating is justified. Or maybe the CCRC isn’t issuing enough bonds to generate constant investor interest. (Of course, the organization may not have any debt at all.) The point is that if a CCRC does not have rated debt, then the consumer and the investor just need to do their homework.

Why CCRC bond ratings matter

You might be wondering why it matters what a CCRC’s bond rating is (if they have one). A big part of the decision to move to a CCRC has to do with peace of mind and security. In many cases, new CCRC residents are making a large down payment in the form of an entrance fee, and in exchange, they are promised access to a continuum of care services should they ever need them in the future.

CCRC residents want to feel confident that this investment in their future is a sound one — that the assurances made by the community will be fulfilled. Among other things, this includes the provision of any long-term care services they may eventually need and timely entry fee refunds.

Understanding data points such as a CCRC’s bond rating, debt service coverage ratio, net operating margins, and net assets give prospective residents the objective, quantitative information they need to make an informed decision about where they want to invest in living.

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