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Rating Action:

Moody's affirms The Nelson Gallery Foundation's (MO) Aa3 issuer rating and Aaa underlying rating on Series 2004A bonds, and expects to affirm VMIG 1 on Series 2004A bonds in conjunction with SBPA substitution; outlook remains stable

18 Apr 2013

Gallery has $57 million of pro-forma rated debt

New York, April 18, 2013 --

Moody's Investors Service has affirmed The Nelson Gallery Foundation's ("NGF") Aa3 issuer rating and Aaa underlying rating on the Series 2004A bonds issued through the Missouri Development Finance Board. We expect to affirm the VMIG 1 short-term rating on the Series 2004A bonds in conjunction with a standby purchase agreement substitution on May 17, 2013. The 2004A bonds are supported by a Donation Agreement with the Hall Family Foundation (rated Aaa/stable), which ensures that timely debt service payments are made to investors. The rating outlook remains stable.

SUMMARY RATINGS RATIONALE

The Aa3 issuer rating reflects The Nelson Gallery Foundation's healthy operating cash flow margins, support from the Hall Family Foundation for debt service on the Series 2004A bonds, prudent debt and expense management, strong liquidity, and our expectation that the gallery will see future fundraising success. The rating also incorporates the gallery's high reliance on endowment and gifts for operating support, very high operating leverage, and the need to maintain operations to cover higher debt service payments in the near term given recent debt service restructure.

The Aaa rating on the Series 2004A bonds reflects Moody's approach to rating jointly supported transactions and is based on The Nelson Gallery Foundation and the Hall Family Foundation (rated Aaa/stable)'s credit fundamentals as well as the Donation Agreement.

We expect to affirm the VMIG 1 short-term rating following a Standby Bond Purchase Agreement (SBPA) substitution on May 17, 2013 with Northern Trust Company (rated Aa3/P-1) .

STRENGTHS

*Well-established regional market position as a leading cultural institution in the Midwest, located in Kansas City, Missouri. In FY 2012, NGF had 418,922 total visitors, up from 370,527 the prior fiscal year. NGF is focused on expanding its membership and geographic reach. Total membership was 11,853 in FY 2012, a nearly 11% increase over the prior year.

*Large financial resource base. Total cash and investments were $382 million in FY 2012, though down 13% from the prior year due to a payoff of $40 million of debt and a negative 0% investment return in FY 2012 (FY ends 4/30/2012).

*Robust liquidity with $263 million in monthly liquidity, providing 225% coverage of $117 million of pro-forma demand debt in FY 2012 and superb coverage of operations. Unrestricted financial resources were a strong 56% of total financial resources in FY 2012.

*Excellent operating cash flow margins, at 30% in FY 2012, and expectations for slightly stronger performance in FY 2013. However, we note that NGF had a -3.6% Moody's calculated operating margin in FY 2012. Management has the flexibility to reduce expenses, as demonstrated by expense cuts made during the recession (primarily in FY 2010).

*Donation agreement from the Hall Family Foundation (HFF), which unconditionally obligates the Hall Family Foundation to pay interest and principal on pro-forma $57 million of the gallery's outstanding variable rate debt, following a $3 million principal payment by HFF in December 2012.

*Prudent debt management, evidenced by a pay-down of $40 million of debt in FY 2012 and the Series 2012A bonds (issued August 2012) that involved restructuring $48 million of variable rate debt to fixed rate mode and smoothing debt service. To date 61% of the gallery's debt is in variable rate mode. The gallery does not have any plans for additional debt issuance.

CHALLENGES:

*High balance sheet leverage relative to peers, with expendable financial resources in FY 2012 providing only 1.5 times pro-forma debt coverage, well below the FY 2010 median of 3.3 times for non-profits rated Aa3. Excluding the pro-forma $57 million Series 2004A that are paid by the HFF, then expendable financial resources cover debt by a stronger 2.17 times.

*Heavy dependence on investment income and gift revenue, representing 52% and 25% of total operating revenue respectively in FY 2012, exposes the gallery to volatility in investment markets and the macro- economy.

*Given the amortization schedule of the Series 2012A bonds, the gallery will have higher debt service payments from 2013 to 2025, and therefore it will be necessary to maintain satisfactory operating performance to cover these increased payments. Current operations in FY 2012 provide only 0.59 coverage of Moody's calculated maximum annual debt service (1.2 times coverage in FY 2011 when there was higher gift revenue).

Outlook

The stable outlook reflects Moody's expectation that The Nelson Gallery Foundation will continue to boost its balance sheet coverage of debt and its operations through strong philanthropic support, and maintain operations sufficient to cover debt service, as well as the fact that there are no additional borrowing plans.

WHAT COULD CHANGE THE RATING UP

Unlikely at this time given high leverage and increasing debt service. Marked growth in financial resources combined with a strengthened market position as demonstrated by growth of visitorship/membership revenue and increased philanthropic support.

WHAT COULD CHANGE THE RATING DOWN

Failure to maintain operating cash flow margins that cover the higher debt service now coming on line; declines in financial resources; continued low fundraising support for operations or weak investment returns leading to poor operating margins; increased debt without commensurate balance sheet and revenue growth.

WHAT COULD CHANGE THE SHORT TERM RATING DOWN

The short-term rating on the bonds would be downgraded if Moody's were to downgrade the short-term rating of the Bank, and could be downgraded if Moody's were to downgrade the long-term rating of the Bonds.

The principal methodology used in this rating was Moody's Rating Approach for Not-for-Profit Cultural Institutions published in November 2004. In addition, the Variable Instruments Supported by Third-Party Liquidity Providers methodology published in November 2006 was also used in assessing the short-term rating. 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.

Emily Schwarz
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

Dennis M. Gephardt
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms The Nelson Gallery Foundation's (MO) Aa3 issuer rating and Aaa underlying rating on Series 2004A bonds, and expects to affirm VMIG 1 on Series 2004A bonds in conjunction with SBPA substitution; outlook remains stable
No Related Data.
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