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Rating Update:

MOODY'S DOWNGRADES YMCA OF GREATER HOUSTON AREA'S (TX) UNDERLYING RATING TO Baa3 FROM Baa2 AND REMOVES RATING FROM WATCHLIST FOR POTENTIAL DOWNGRADE; OUTLOOK IS NEGATIVE

29 Jul 2011

RATING ACTION AFFECTS $200 MILLION OF RATED DEBT OUTSTANDING

Not-for-Profit Organization
TX

Opinion

NEW YORK, Jul 29, 2011 -- Moody's Investors Service has downgraded the YMCA of the Greater Houston Area's (YMCA) underlying rating to Baa3 from Baa2 and removed the rating from Watchlist for potential downgrade. This rating action affects $200 million of debt outstanding issued through the Harris County Cultural Education Facilities Finance Corporation. The outlook is negative.

SUMMARY RATING RATIONALE

The downgrade to the Baa3 rating incorporates the YMCA's elevated leverage and debt structure risk due to thin liquidity and limited headroom under financial covenants contained in the Letter of Credit Reimbursement Agreements combined with weak operating performance and limited potential for material liquidity or balance sheet improvement. The downgrade also reflects a materially slower increase in revenues than expected from the pre-recession debt-financed expansion plans. The Baa3 rating also reflects the YMCA's important community role within the growing Houston metropolitan area, strong brand name, and diverse program revenues.

The negative outlook reflects our expectation that the YMCA could be challenged to absorb increases to interest rates and other debt-related costs of its variable rate debt despite expense reductions taken to offset lower than projected revenues in the last couple of years, some financial flexibility to eliminate programs and further adjust operational expenses or revenues, and expected improvements to its relatively weak balance sheet. The outlook also reflects the YMCA's limited prospects for improving liquidity or balance sheet strength relative to the amount of demand debt outstanding given its history of modest fund raising relative to comparably rated entities, weak debt service coverage, and the expectation of continued operating pressure as management faces the challenge of adjusting operations to incorporate the opening of new centers in conjunction with the impact of the financial downturn.

CHALLENGES:

*Liquidity risks associated with debt structure given relatively thin liquidity and limited headroom under covenants contained in the Letter of Credit Reimbursement Agreement. In FY 2010, unrestricted cash and investments that could be liquidated within a month covered $200 million of variable rate demand bonds by 43.3%.

*Highly leveraged balance sheet and operating position, with debt to operating revenues at nearly 2 times in FY 2010 and expendable financial resources to debt at 0.48 times in FY 2010. Despite expected revenue growth in FY 2012, the first full year of operations with all centers in operation, and additions to the balance sheet resulting from one-time revenues from the sale of property, leverage is expected to remain elevated.

*Weak operating performance compounded by significantly lower than projected revenue growth related to the opening of new centers in FY 2011. Despite expense reductions over the last two fiscal years and an approved membership rate increase for FY 2012, we expect the YMCA will be challenged to realize positive operating margins and cash flow in support of debt service over the next few years.

STRENGTHS:

*Vital community role and strength of brand in providing a variety of services in the demographically strong Houston metropolitan area, which provides the fundamental underpinning for underlying rating.

*Diverse programming and revenues which enhances the long-term fiscal stability of the YMCA and helps insulate the organization from variability in any single revenue source. The YMCA has 37 centers, one camp, 246 licensed childcare sites, and 15 apartment outreach centers located throughout the metropolitan area, adding to the underlying revenue diversity and representing geographical diversity within the area.

*No near-term borrowing plans combined with start of principal payments in FY 2012 should contribute to improved balance sheet leverage over time.

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: Payments are secured by a pledge of Gross Revenues. In addition, the Indenture includes a Total Net Assets, Historical Debt Service Coverage, and Liquidity Ratio covenant. The Series 2008 Bonds are further secured by a cash funded debt service reserve fund.

DEBT STRUCTURE: All of YMCA's debt is variable rate, comprised of the $200 million Series 2008A, B, C, D, and E Bonds. Three different banks serve as letter of credit (LOC) providers for the five series of bonds, as follows: JPMorgan Chase Bank, N.A. (rated Aa1, on review for possible downgrade/P-1) supports the $75 million Series 2008A and the $25 million Series 2008E with LOCs that each expire June24, 2014; Bank of America (rated Aa3, on review for possible downgrade/P-1) supports the $50 million Series 2008B and the $25 million Series 2008C with LOCs expiring June 24, 2013; and Compass Bank (rated A3/P-2) supports the Series 2008D with an LOC that expires June 24, 2013. The first principal payment will be made in FY 2012.

All of the five LOC agreements are subject to the same covenants, events of default and term out provisions. Covenants that apply to these LOCs include: maintaining a minimum rating by Moody's of Baa3; a minimum Debt Service Coverage ratio of 1.5x at the end of each fiscal quarter; maintenance of at least $100 million of total net assets at the end of each fiscal year; and a Liquidity Ratio that requires that unrestricted cash and investments to debt outstanding is at least 32.5% through FY 2011 and not less than 35% thereafter, to be checked semi-annually at the end of the second and fourth quarters.

Based on the YMCA's covenant calculations as of May 31, 2011, Debt Service Coverage was 2.02 times, Total Net Assets was $128.6 million, and the Liquidity Ratio was 38.5%. Management projects similar results for the fiscal year end 2011, although management projects that the Liquidity Ratio will be slightly higher at just over 40%, but still weak relative to debt outstanding.

If Debt Service Coverage falls below the minimum 1.5x covenant threshold, but is above 1.2x, the YMCA shall hire an independent management consultant at its own expense within 45 days of the end of the fiscal quarter in which it did not meet the covenant, and then implement any revenue or expense recommendations that are recommended by the consultant. Debt Service Coverage below 1.2x constitutes an event of default.

If the required Liquidity Ratio is not met, the YMCA will have 45 days from that time to provide a written report to each Series 2008 credit provider describing the YMCA's plans to meet the required minimum Liquidity Ratio. Failure to cure this violation within 30 days of the delivery of such a report will result in an event of default under the Master Indenture.

With certain events of default (EODs), any of the banks may elect to declare any or all amounts owed be immediately due and payable. These EODs include Moody's rating being withdrawn, suspended or lowered below Baa3; failure to maintain financial covenants, including Debt Service Coverage below 1.2x and inability to cure the Liquidity Ratio within 75 days of not meeting the ratio.

After a liquidity draw and in the absence of an event of default, the draw is converted into a Term Loan and the term out period begins 30 days later, payable in quarterly installments until the earlier of the Letter of Credit expiration or substitution date or the third anniversary of the Term Loan.

INTEREST RATE DERIVATIVES: None.

RECENT DEVELOPMENTS/RESULTS:

After successfully renewing all five letter of credit (LOC) agreements before the June 11, 2011 expiration date, the YMCA remains exposed to renewal risk, in addition to interest rate risk. In April of 2011, the YMCA substituted two and extended three letter of credit agreements that support the demand feature of its variable rate debt. By staggering the expiration dates of the LOCs between June 24, 2013 and June 24, 2014, renewal risk is slightly lessened. All LOCs supporting the YMCA's demand debt are subject to the same covenants, including debt service coverage and liquidity ratios.

We expect that the YMCA's liquidity will remain narrow, particularly against liquidity ratio covenants, and with the first principal payment due in FY 2012. In FY 2010, the YMCA's minimum liquidity ratio requirement was 30%, calculated as unrestricted cash and investments to debt outstanding, which compared to an actual 43.4% at fiscal year-end 2010. The minimum liquidity ratio increased to 32.5% in FY 2011. Since FYE 2010, the semi-annual calculations of the liquidity ratio has declined, to 37.9% as of November 30, 2010 and 37.3% as of February 28 ,2011, providing narrowing cushion against this covenant. Management projects that the FYE 2011 liquidity ratio will be 41.5%, which is still low and below the 43.4% at FYE 2010. Although the YMCA has received a commitment for the purchase of one of its centers for $2.5 million, which is expected to close in November 2011 and add to its cash position given no current plans to spend the proceeds, management currently does not have a liquidity policy or target separate from meeting the liquidity covenant. We believe that the YMCA will have limited ability to improve its liquidity materially in the foreseeable future given the challenges to date of adjusting operations sufficiently to incorporate the opening of the new centers and weaker than expected membership and program revenue. We note that the Board of Trustees plays a limited role in vetting budgetary assumptions or making adjustments to annual financial operating plan, with responsibilities for setting budgets and making interim operating adjustments with senior management.

We expect that the YMCA will remain challenged to realize breakeven operations, as calculated by Moody's, although management projects ending FY 2011 with a slight surplus on a cash basis. Based on figures provided in the covenant calculations as of May 31, 2011, operating expenses exceeded operating revenues by $3.4 million. Management has projected an operating surplus by FYE 2011 (ending August 31). However, we believe it is unlikely that the reported revenue growth related to memberships and summer programs since then will sufficiently improve operations to reflect positive operating margins, as calculated by Moody's, after factoring debt service and debt-related expenses, depreciation expense, for which the YMCA does not budget, and a 5% spend rate. Fiscal year 2011 included aggressive assumptions for membership growth, and while membership revenues will fall short of budget by about $1 million, they have increased by about $2.6 million so far in FY 2011 compared to the same time last year. Although membership numbers and revenues generally increase after the opening of new centers given anticipated demand prior to their opening, actual increases have been slower than anticipated. Fiscal year 2012 will be the first full year in which all of the organization's centers will have been open, include a 3% increase to membership fees effective in November 2011 after no increases in the last fiscal year, as well as the first principal payment of its debt equaling approximately $3.6 million.

While the YMCA has identified areas of financial flexibility to cut expenses totally $3-$4 million, it has not indicated an intention to do so as a way to significantly improve its cash flow or balance sheet, but would institute them to avoid breaking a financial covenant or missing debt service. The YMCA is particularly exposed to interest rate risk given that that the FY 2012 assumption budgeted for interest rate costs and LOC fees is 2.26%, in addition to the first principal payment of $3.635 million due against the $200 million of demand debt outstanding. Although the YMCA has indicated that the actual cost of debt has been under 2% so far in FY 2011, we note that a 10 basis point change in interest rates would result in an approximately $200,000 increase in interest expense, which could put further challenge already pressured operations given budgeting assumptions for debt service costs that closely mirror the actual interest environment.

Outlook

The negative outlook reflects our expectation that the YMCA could be challenged to absorb increases to interest rates and other debt-related costs of its variable rate debt despite expense reductions taken to offset lower than projected revenues in the last couple of years, some financial flexibility to eliminate programs and further adjust operational expenses or revenues, and expected improvements to its relatively weak balance sheet. The outlook also reflects the YMCA's limited prospects for improving liquidity or balance sheet strength relative to the amount of demand debt outstanding given its history of modest fund raising relative to comparably rated entities, weak debt service coverage, and the expectation of continued operating pressure as management faces the challenge of adjusting operations to incorporate the opening of new centers in conjunction with the impact of the financial downturn.

WHAT COULD MAKE THE RATING GO UP

Unlikely given the negative outlook. Over the long-term term, growth of liquidity and revenues to better support the YMCA's current debt; sustained improvement in operating performance to comfortably meet rising debt service requirements

WHAT COULD MAKE THE RATING GO DOWN

Acceleration of the variable rate debt due to failure to comply with covenants could lead to a rapid deterioration of the rating; deterioration of operating performance or liquidity

KEY INDICATORS (Fiscal year 2010)

Total Membership Units (1 unit averages 3 members): 68,621 units (-3% from FY 2009)

Total Direct Debt: $200 million

Expendable Financial Resources: $50.7 million

Expendable Financial Resources to Direct Debt: 0.25 times

Expendable Financial Resources to Operations: 0.49 times

Monthly Liquidity: $96.8 million

Monthly Liquidity to Demand Debt: 0.48 times

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 370 days

Three-Year Average Operating Margin: -2.5%

Reliance on Membership Revenue (% of Operating Revenue): 46.8%

Reliance on Gifts (% of Operating Revenue): 7.8%

RATED DEBT

Series 2008A: underlying Baa3; Aa1 (on review for possible downgrade)/VMIG 1 based on letter of credit provided by JPMorgan Chase Bank, N.A. (expires June 24, 2014)

Series 2008B: underlying Baa3; Aa3 (on review for possible downgrade)/VMIG 1 based on letter of credit provided by Bank of America (expires June 24, 2013)

Series 2008C: underlying Baa3; Aa3 (on review for possible downgrade)/VMIG 1 based on letter of credit provided by Bank of America, N.A. (expires June 24, 2013)

Series 2008D: underlying Baa3; A2/VMIG 2 based on letter of credit provided by Compass Bank (expires June 24, 2013)

Series 2008E: underlying Baa3; Aa1 (on review for possible downgrade)/VMIG 1 based on letter of credit provided by JPMorgan Chase Bank, N.A. (expires June 24, 2014)

CONTACTS

YMCA of the Greater Houston Area: Mike Emmons, Senior Vice President and Chief Financial Officer, 713-758-9115; Samantha Buckner, VP/Assistant Treasurer, 713-758-9113

PRINCIPAL METHODOLOGY USED

The rating on the YMCA of Greater Houston's debt was assigned by evaluating factors believed to be relevant to the credit profile of the YMCA of Greater Houston such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) the issuer's management and governance structure related to payment.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a 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

Jenny L. Maloney
Analyst
Public Finance Group
Moody's Investors Service

Karen Kedem
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


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MOODY'S DOWNGRADES YMCA OF GREATER HOUSTON AREA'S (TX) UNDERLYING RATING TO Baa3 FROM Baa2 AND REMOVES RATING FROM WATCHLIST FOR POTENTIAL DOWNGRADE; OUTLOOK IS NEGATIVE
No Related Data.
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