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Rating Action:

Moody's assigns A1 rating to the Indianapolis Museum of Art's (IN) $37.3 million Educational Facilities Revenue Refunding Bonds, Series 2013B and affirms A1 issuer rating; outlook is negative

Global Credit Research - 05 Apr 2013

Museum has $118.6 million of pro forma rated debt including debt rated based on letter of credit support

New York, April 05, 2013 --

Moody's Rating

Issue: Educational Facilities Revenue Refunding Bonds, Series 2013B; Rating: A1; Sale Amount: $37,250,000; Expected Sale Date: 4-15-2013; Rating Description: Revenue: 501c3 Unsecured General Obligation

Opinion

Moody's Investors Service has affirmed its A1 issuer rating on the Indianapolis Museum of Art (IMA) and has assigned an A1 rating to the IMA's Educational Facilities Revenue Refunding Bonds, Series 2013B. The bonds will be issued through the Indiana Finance Authority. The outlook remains negative.

SUMMARY RATING RATIONALE

The A1 rating is based on the Indianapolis Museum of Art's status as a prominent Indianapolis cultural institution with $337 million of total financial resources, board resolve to move to sustainable operating performance and improved prospects for philanthropic support under a new director. Challenges include uncommonly high operating leverage, and limited revenue diversity with 70.8% reliance on investment income in fiscal year (FY) 2012. The current plan of finance calls for a reduction in demand debt as well as some scheduled principal reduction through amortization.

The negative outlook reflects the weakened operating performance as a result of a decline in unrestricted gift revenue and an elevated reliance on investment earnings for operations. While the board and management have a plan to increase earned revenue and donor support, the museum will likely continue to rely on elevated endowment spending for several years.

STRENGTHS

*Leading market position in Indianapolis as a general art museum on a 152-acre campus which includes an historic estate designated as a National Historic Landmark as well as an art and nature park which had nearly 370,000 visitors in 2012. The museum also owns the Miller House, a modern landmark home open to the public in Columbus, Indiana.

*Considerable financial resources totaling $337 million in FY 2012, 62% of which is expendable. Expendable financial resources cushion pro forma debt by 1.8 times and operating expenses by 6.5 times, pointing to considerable flexibility and balance sheet strength.

*Deeply engaged board and successful fundraising operation which averaged $9.0 million per year in FYs 2010 through 2012, with a significant level of unrestricted support. Donor support is expected to increase after the hiring of a new director, following a period of chief executive vacancy.

*Recent investments in facilities should leave the museum well positioned for some time with our calculation of average age of plant at 12.1 years. The museum is developing a comprehensive plan for regularly scheduled maintenance reserves as part of its multi-year planning.

*Move to a less aggressive debt structure and enhanced counterparty diversity. Through the current plan of finance, variable rate exposure will move from 100% to 47%, a portion of the debt will be converted from demand debt to bank purchase mode with a fixed rate through 2018 although the $37.3 million of fixed rate bonds will be scheduled to amortize over a period of 20 years.

CHALLENGES

*Uncommonly high operating leverage with $118.6 million of pro forma debt equivalent to 5.2 times Moody's adjusted FY 2012 operating revenue of $23 million. With maximum annual debt service (MADS) modeled at 8% of principal outstanding, MADS is 31% of FY 2012 operating expenses, two and one-half times higher than the median of 12% for Moody's rated cultural not-for-profits.

*Weak operating performance driven by larger than typical endowment spending measured by Moody's pro-forma 5% draw. We calculate a three-year average cash flow margin of 9.3% and thin average interest-only debt service coverage of 1.5 times (prior debt is structured with bullet maturities in 2036, 2037 and 2039). While the museum's formal spending policy allows for 5.5% of a trailing three-year average, the board has supported spending between 5.5% and 6.0% as the museum has adjusted to the investment losses in 2009. We expect spending to be above 5% for some time which could add pressure the real purchasing power of the endowment over time.

*With high reliance on investment income (70.8% of operating revenue in fiscal 2012), increasing unrestricted donor support and earned revenue will likely prove crucial for enhanced revenue diversity and longer term financial health.

*While debt structure risk is being reduced under the current plan of finance, the IMA will still have $55 million of variable-rate demand obligations, backed by letters of credit with JPMorgan Chase Bank, N.A. (rated Aa3/P-1). Along with this debt, our calculation of demand debt includes $26 million of the direct placement bonds with PNC Bank structured with a fixed rate for five years. Annual liquidity, as measured by Moody's of $115 million, covers pro forma demand debt by 142%, partially mitigating the related risks.

Outlook

The negative outlook reflects the museum's exposure to investment losses and its elevated endowment spending as well as its ongoing need for donor support to sustain operations. Stability could return to the outlook through enhanced donor support, growth in cash and investments and further improvement in the cushion of liquidity to demand debt.

WHAT COULD MAKE THE RATING GO UP

Strengthening of operating performance and coverage of debt service through operations combined with material increase in flexible reserves, reduction of operating leverage, and increased donor support.

WHAT COULD MAKE THE RATING GO DOWN

Deterioration of unrestricted liquidity including board-designated endowment funds; reduction in headroom over the financial covenant in the bank agreements; failure to achieve positive cash flow margin able to cover debt service costs over the next eighteen months; reduction in cash and investments through investment losses or endowment spending in excess of investment returns.

METHODOLOGY

The principal methodology used in this rating was Moody's Rating Approach for Not-for-Profit Cultural Institutions published in November 2004. 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.

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.

Dennis M. Gephardt
Vice President - Senior 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

Edith Behr
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns A1 rating to the Indianapolis Museum of Art's (IN) $37.3 million Educational Facilities Revenue Refunding Bonds, Series 2013B and affirms A1 issuer rating; outlook is negative
No Related Data.

 

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