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Rating Update:

MOODY'S MAINTAINS YMCA OF THE GREATER HOUSTON AREA'S Baa2 UNDERLYING RATING ON WATCHLIST FOR POSSIBLE DOWNGRADE

25 Mar 2011

TOTAL OF $200 MILLION OF RATED DEBT OUTSTANDING

Not-for-Profit Organization
TX

Opinion

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 structure.

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.

STRENGTHS:

*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.

CHALLENGES:

*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 centers.

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.

Outlook

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 expiration dates

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%

RATED DEBT

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, 2011)

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)

CONTACTS

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.

REGULATORY DISCLOSURES

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.

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


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S MAINTAINS YMCA OF THE GREATER HOUSTON AREA'S Baa2 UNDERLYING RATING ON WATCHLIST FOR POSSIBLE DOWNGRADE
No Related Data.
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