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Rating Update:

MOODY'S AFFIRMS A3 RATING ON CHICAGO SYMPHONY ORCHESTRA; OUTLOOK REVISED TO NEGATIVE FROM STABLE

12 May 2011

THE ORCHESTRA HAS $83.0 MILLION OF RATED DEBT OUTSTANDING

Illinois Finance Authority
Not-for-Profit Organization
IL

Opinion

NEW YORK, May 12, 2011 -- Moody's Investors Service has affirmed the A3 underlying rating on the Chicago Symphony Orchestra's (CSO) $83 million of Adjustable Rate Demand Revenue Bonds, Series 2008, issued through the Illinois Finance Authority. The rating outlook has been revised to negative from stable reflecting a weakened balance sheet, imbalanced operations, as calculated by Moody's, which we expect will continue in the near-term unless CSO is able to significantly increase unrestricted gifts or ticket revenue.

SUMMARY RATING RATIONALE

The A3 rating incorporates the Chicago Symphony Orchestra's strong reputation as a top-tier organization with robust gift revenue that has remained strong during the recent recession. The rating and negative outlook are also based on a trend of weak revenue growth resulting in deteriorating operating margins, a 100% variable rate debt structure with tight financial covenants, and a growing pension liability.

CHALLENGES

*Uneven operating results given stable operating revenues and a growing fixed cost structure. CSO ended the 2010 year with a -7.2% operating margin and inadequate debt service coverage at 0.8 times. Moody's expects that operations will remain somewhat challenged in the near term.

*Aggressive debt structure with 100% variable rate demand structure and long-dated bullet maturities supported by three letters of credit and associated swaps. Monthly liquidity to cover demand debt is adequate at 1.2 times coverage.

*Growing pension obligation placing stress on the balance sheet and operating results.

STRENGTHS

*Top-tier symphony with world-wide reputation resulting in stability of revenues from subscriptions and individual tickets sales even during the recent recession.

*Robust average annual gift revenue at over $27 million for the fiscal years ending 2008-2010 with CSO ending the 2010 fiscal year with an all time five-year high of $33 million in revenue.

*Substantial pool of total cash and investments of $288 million, with monthly liquidity of $180 million. Adequate level of expendable financial resources providing 1.0 times coverage of debt and 2.1 times coverage of operations.

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: General unsecured obligation.

DEBT STRUCTURE: The Symphony has three outstanding series of variable rate demand debt supported by Letters of Credit. Amortization of debt is largely through long-dated bullet maturities. The Series 2008 bonds ($83 million) have a short-term rating of Aa2/VMIG1 based on LOC support provided by US Bank (rated Aa2/P-1). The Series 1994 Bonds ($50 million) are supported by a LOC from Northern Trust Company (rated Aa3/P-1) and the Series 1999 ($12.5 million) are supported by a LOC from JPMorgan Chase Bank N.A. (rated Aa1/P-1). All three LOC's have stated expiration dates of December 31, 2013.

The Reimbursement Agreements all require CSO to maintain certain financial covenants which, if breached, could result in an Event of Default and require immediate repayment of principal to the banks. All three require the Symphony to maintain an unrestricted cash and investments to indebtedness covenant of at least 0.9 times at the close of FY2011, 0.95 times at the close of FY2012 and 1.1 times at the close of 2013 and thereafter. As of June 30, 2010, CSO reported a ratio of 1.34 times. All three also require the CSO to maintain a ratio of Income Available for Debt Service to Fixed Charges of at least 1.15x. CSO reported a ratio of 1.54x as of the 2010 fiscal year end. The Reimbursement Agreements to the Northern Trust and JPMorgan Chase LOC's also have a change in net assets covenant that stipulates the change in unrestricted operating net assets cannot show a deficit in excess of $2.5 million as of FY 2010 and FY 2011. The Symphony was in compliance in FY 2010. Based on performance to-date, management expects to meet all the above covenants at the close of the current 2011 fiscal year. Moody's notes that in the event that these covenants are breached, the banks have the ability to demand immediate repayment in full. If this were to occur, it may precipitate rapid downward rating movement.

INTEREST RATE DERIVATIVES: CSO has two swaps (notional amounts of $40 million and $50 million) with a subsidiary of Goldman Sachs in order to synthetically fix the interest rate on 61% of its outstanding VRDO debt. Under the agreements, CSO pays a fixed rate of 3.782% and 3.561% and Goldman pays a floating rate based on 67% of 1-month LIBOR. The $40 million swap expires in 2028 and the $50 million swap expires in 2033. Additional termination events could be triggered by a downgrade of CSO's credit rating below Baa2 by Moody's or BBB in the case of S&P and Fitch. Under the agreement, Goldman's subsidiary, but not CSO, would be required to post collateral under certain circumstances. As of April 20, 2011, the mark to market valuation of the $40 million and $50 million swaps was an aggregate $12.2 million liability to CSO.

RECENT DEVELOPMENTS

Market: Since FY 2008, ticket sales have remained stable overall with 233,000 subscriptions and single ticket sales in FY2010, compared to 230,000 in FY2002 with stable projections for FY2011 based on performance to date. While aggregate numbers have remained stable, subscriptions have declined as a percentage of sales while single tickets have grown from 24% in FY2002 to 39% projected for FY2011, comparable with FY 2010. Overall, capacity utilization has remained relatively constant since FY2002 at 82%. Management continues to utilize dynamic pricing strategies in an effort to maximize ticket sales and cultivate new audiences. In 2008, the Chicago Symphony was ranked by Gramaphone Magazine as the number one orchestra in the U.S. and the number five orchestra in the world. The Symphony has attracted top-tier talent with Riccardo Muti taking over as Music Director in 2010 and Yo-Yo Ma collaborating as the Judson and Joyce Green Creative Consultant. The Symphony continues to tour internationally and remains a destination orchestra for top musicians.

Operations: Moody's expects that CSO will continue to produce mixed operating results give the highly fixed and inflexible cost structure and limited growth of major revenue sources. The Symphony generates revenues from three primary sources with 40% from ticket sales, 33% from gift revenues and 23% from endowment support. While ticket revenue has remained stable, the Symphony has been challenged to grow this revenue stream in recent years. In FY2010, unrestricted gift revenue available for current year operations (as defined by Moody's) declined to $22.0 million; down from $26.7 million the prior year. Flat admissions revenue, softer unrestricted gift revenue available for current year operations and a reduced endowment spend given FY2009 investment losses contributed to the negative margin in FY2010. Moody's expects that revenues will see limited additional growth in the near term. Growth in ticket sales and annual fund revenues will be key to maintaining positive operations and credit strength going forward.

The Symphony has a fairly fixed cost structure which includes maintenance of the performance facilities and musician union contracts. The next round of negotiations is in FY2013. The highly fixed cost structure includes regular salary increases and highlights the need for continued growth of revenues to achieve positive operating results.

Operating results have been somewhat uneven in recent years with a three year average operating margin of -3.6%, as per Moody's calculations which includes a 5% spending on the prior three years of cash and investments and recognizing depreciation. The Symphony ended the 2010 fiscal year with a weakened margin of -7.2%. Cash flow at 4.4% in FY2010 was insufficient to provide coverage of interest only debt service at 0.8 times. Moody's expects that given challenged revenue growth and sustained expenditure needs, operations will remain imbalanced in the near term.

Fundraising: Notably, CSO has maintained strong momentum in total gift revenue in FY2009 and FY2010 with continued robust expectations for FY2011. In FY2010, CSO reached a five-year high in total gift revenue with over $33.4 million in gift receipts, resulting in a total three year average of over $27.3 million. CSO is in the early stages of planning for a comprehensive fundraising campaign which will focus on growing annual fund receipts and endowment assets. Moody's notes that CSO is dependent on gift revenues for 33% of annual revenues highlighting the need for continued strength in this line item.

Balance Sheet: CSO, at the close of the 2010 fiscal year, had $145.5 million of expendable financial resources providing 1.0 times coverage of $145.5 million of outstanding debt, down from a peak of 1.6 times coverage in FY2007, given recent investment losses coupled with a growing pension obligation ($22.4 million) and swap liability ($17.6 million). Expendable resources provide a more healthy 2.1 times coverage of operations. Operational leverage is high at 2.2 times debt to revenues indicating limited additional debt capacity. CSO has no additional debt plans.

The Symphony maintains a healthy level of liquidity from an operational perspective with $180.3 million in monthly liquidity or 986 days cash on hand. At the same time, liquidity to cover its 100% variable rate debt structure is more modest at 1.2 times coverage of total demand debt. Thin liquidity coverage of demand debt will continue to place pressure on the current rating of CSO.

Pension: CSO maintains a defined benefit pension plan for musicians(open)and staff(now frozen) which was 62% funded as of the close of the 2010 fiscal year with a $22.4 million pension liability carried on CSO's balance sheet. Management's expectation is to continue to fund at least the annual minimum amount required by law, which was a combined $3.2 million for the two plans in FY2010.

Investments: At the close of the 2010 fiscal year, CSO had $205 million of total endowment assets following a positive 14.5% investment return during that year. At December 31, 2010, CSO's endowment value increased to $233 million as a result of gift revenue and continued healthy returns at 14.5% for the first six months of the 2011 fiscal year. Investments consist of 23.4% domestic equity, 24.6% international equity, 11.5% hedged equity, 12.7% absolute return, 9.1% real assets, 5.0% private equity and 13.7% fixed income and cash.

Moody's expects to review the Symphony's rating again once the 2011 audit is available and expects to publish an updated report in the fall of 2011.

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

Outlook

The negative outlook is based on CSO's challenged revenue streams, weakened balance sheet supporting endowment spending, and growing pension obligation. The negative outlook also incorporates CSO's 100% variable rate debt structure with interest-only amortization and restrictive financial covenants.

What Could Change the Rating - UP

Sustained improvement in operating performance as a result of unrestricted revenue growth; material growth of unrestricted liquidity supporting debt

What Could Change the Rating - DOWN

Continued imbalance of operations with weak coverage of debt service; declines in financial resources supporting debt and operations; deterioration in market position; material change in liquidity profile.

KEY DATA AND RATIOS (Fiscal year 2010 financial data)

Total Financial Resources: $218.6 million

Total Direct Debt: $145.5 million

Total Operating Revenues: $65.9 million

Expendable Resources to Direct Debt: 1.0 times

Expendable Resources to Operations: 2.1 times

Monthly Days Cash on Hand: 714 days

Monthly Liquidity to Demand Debt: 0.9 times

Three-Year Average Operating Margin: -3.6%

Average Debt Service Coverage: 1.35 times

Reliance on Gifts for Operations: 33%

Reliance on Endowment: 23%

RATED DEBT:

Series 2008: A3 (VMIG1based on letter of credit support provided by U.S. Bank with a stated expiration of December 31, 2013)

CONTACTS:

CSO: Isabelle Goossen, Vice President for Finance and Administration, 312-294-3301

METHODOLOGY

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

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Stephanie Woeppel
Analyst
Public Finance Group
Moody's Investors Service

Dennis M. Gephardt
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S AFFIRMS A3 RATING ON CHICAGO SYMPHONY ORCHESTRA; OUTLOOK REVISED TO NEGATIVE FROM STABLE
No Related Data.
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