TOTAL OF $200 MILLION OF RATED DEBT OUTSTANDING
NEW YORK, Mar 25, 2011 -- Moody's Investors Service is maintaining the YMCA of the Greater Houston Area's
(YMCA) Baa2 underlying rating on Watchlist for possible downgrade. The rating
action impacts the underlying rating on $200 million of Revenue Bonds, Series
2008A-E issued through the Harris County Cultural Education Facilities Finance
Corporation. The bonds are variable rate demand bonds supported by letters of
credit from five different banks, as described in the RATED DEBT section,
below. We expect to conclude our next review of the rating within a
30-day timeframe. Our review will focus on the YMCA's planned liquidity facility
substitution and how it manages liquidity and operating risks in light its debt
SUMMARY RATING RATIONALE
We have extended the Watchlist period by 30 days for the YMCA's
underlying rating pending the review of new Letter of Credit (LOC) agreements
that will replace two of the five LOCs expiring on June 24, 2011, and
extend/renew the other three LOC documents, also expiring on June 24, 2011. The
LOCs are associated with $200 million of Series 2008A, B, C, D, and E variable
rate demand bonds. We expect the review to be completed prior to the estimated
April 20, 2011 tender date for the Series 2008 bonds.
*The YMCA's vital community role in providing a variety of services in
demographically strong and growing part of Houston area, which provides
fundamental underpinning for underlying rating.
*Improved operating performance in FY2010 and expected in FY2011 and FY2012
given the completion of two centers, including a new center in downtown Houston.
Membership numbers and revenues are expected to increased given anticipated
demand prior to opening of the new centers.
*Notably conservative investment portfolio contributes to strong
liquidity compared to operating expenses, with all of its long-term investments
in cash or fixed income securities.
*No near-term borrowing plans combined with start of principal payments in FY
2012 should contribute to improved balance sheet leverage over time.
*Liquidity and operating risks associated with debt structure given $200 million
in debt in variable rate mode with tender-feature. Based on Moody's calculation,
monthly liquidity to demand debt provided a thin 48.4% coverage of demand debt
in FY 2010. The YMCA of Greater Houston will have LOCs from three banks
associated with all its debt, which will continue to pose renewal risks
although the renewals associated with the current transaction will somewhat
mitigate this risk by staggering expirations of the LOCs in 2013 and 2014.
*Highly leveraged balance sheet and operating position, with debt to operating
revenues at nearly 2 times in FY2009 and FY2010, and expendable resources to
debt at 0.48 times in FY2010. Future debt capacity at the current rating is
dependent on additional revenue and financial resource growth.
*Relative moderate philanthropic support for an organization of this size.
However, the YMCA is currently in midst of a $30 million capital campaign, which
was reduced from $40 million to reflect the fewer capital projects that the YMCA
will undertake, and has raised about $25 million in gifts and pledges.
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.
INTEREST RATE DERIVATIVES: None.
RECENT DEVELOPMENT RESULTS:
All of YMCA's debt is variable rate with a put feature supported by five LOCs.
All five LOCs are currently set to expire on June 11, 2011, exposing the YMCA to
significant renewal risk. However, the organization plans to extend the
expiration dates for three of the LOCs and replace two of them with expiration
dates staggered over a two-year period (in 2013 and 2014), which we view
positively. To further mitigate risks associated with its debt structure, the
YMCA conservatively assumes a 6% interest rate, or $12 million
annually, compared to a significant lower actual rate historically. In
addition, the YMCA maintains essentially all of its reserves in fixed income
and cash, which provides strong liquidity compared to operating expenses. At
fiscal year end 2010, unrestricted monthly liquidity improved to $96.8 million
from nearly $82 million in FY 2009, providing 370 days of operating days cash on
hand (from 301 days in FY 2009).
We expect the YMCA's operating performance will improve modestly due
to memberships that generally spike immediately following a major upgrade or
expansion, increases in membership fees that are planned for FY 2012 to reflect
the improved facilities, and expenditure controls in FY 2009 and FY 2010 that
resulted in a 5.5% reduction in expenses from FY 2008 levels. Membership is
projected to increase after the opening of two new centers in FY 2011, reversing
membership declines in FY 2009 and FY 2010 due in part to the financial
downturn and some membership falloff in anticipation of the opening of the
new centers. In addition to revenue increases from traditional family and
individual memberships, new corporate memberships and a 3-4% increase to
membership rates are projected to improve revenues, particularly in FY 2012, the
first full year in which all of the organization's centers will have been open.
The YMCA does not budget for the non-cash expense of depreciation, although it
budgets annually for renewal and replacement of its facilities. At about $5
million, the amount budgeted for renewal and replacement has historically
approximately matched depreciation. However, with the addition of two new
centers, management recognizes that depreciation will exceed renewal and
replacement and the need to address this mismatch going forward. The YMCA
produced an improved, but still weak, operating margin of -0.3% in FY 2010,
although cash flow margin was satisfactory at 8.2%. The operating improvement in
FY 2010 largely reflected another 2.7% reduction in expenses (after a 2.8%
reduction in FY 2009) and a 4.7% investment return after two years of
losses. Year to date, management reports that FY 2011 operations are ahead of
last year at the same time and are expected to end at least
balanced, particularly with anticipated membership growth related to the new
The YMCA is in the midst of a $30 million capital campaign, toward which it has
raised approximately $25 million in gifts and pledges. The reduction in the
campaign target from $40 million corresponds to a commensurate reduction in
capital projects that the YMCA plans to complete.
The YMCA's underlying Baa2 rating remains on Watchlist pending the review of the
new Letter of Credit (LOC) agreements that will replace two of the five LOCs
expiring on June 24, 2011, and extend/renew the other three LOC documents, also
expiring on June 24, 2011. We expect the review to be completed prior to the
estimated April 20, 2011 tender date for the Series 2008 bonds and our review
will focus on the YMCA's planned liquidity facility substitution and how it
manages liquidity and operating risks in light its debt structure.
WHAT COULD CHANGE THE RATING UP
Substantial growth of financial resources through increased
philanthropic support; improvement of operating performance after meeting
rising debt service coupled with diversification of LOC providers and
WHAT COULD CHANGE THE RATING DOWN
Acceleration of the variable rate debt due to failure to comply with
covenants, weaker operating performance, reduced balance sheet
cushion; additional borrowing
KEY INDICATORS (Fiscal year 2010)
Total Membership: 68,621 members (-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%
Series 2008A: Baa2 underlying rating on watchlist for downgrade; Aa1/VMIG1 based
on a letter of credit provided by JPMorgan Chase Bank, N.A. (expires June 24,
Series 2008B: Baa2 underlying rating on watchlist for downgrade; Baa1 (on
watchlist for possible downgrade)/VMIG3 based on a letter of credit provided by
Allied Irish Bank (expires June 24, 2011)
Series 2008C: Baa2 underlying rating on watchlist for downgrade; Aa3/VMIG1 based
on a letter of credit provided by Bank of America, N.A. (expires June 24, 2011)
Series 2008D: Baa2 underlying rating on watchlist for downgrade; A2/VMIG2 based
on a letter of credit provided by Compass Bank (expires June 24, 2011)
Series 2008E: Baa2 underlying rating on watchlist for downgrade; Baa1 (on
watchlist for possible downgrade)/S.G. based on a letter of credit provided by
Regions Bank (expires June 24, 2011)
YMCA of the Greater Houston Area: Mike Emmons, Senior Vice President and Chief
Financial Officer, 713-758-9115; Wayne Brewer, Executive Vice President/COO,
713-758-9130, 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.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, 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.
Jenny L. Maloney
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S MAINTAINS YMCA OF THE GREATER HOUSTON AREA'S Baa2 UNDERLYING RATING ON WATCHLIST FOR POSSIBLE DOWNGRADE
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