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Rating Action:

Moody's downgrades Metropolitan Opera Association (NY) bonds to Baa1; outlook negative

Global Credit Research - 22 Dec 2014

$100M rated debt

New York, December 22, 2014 -- Moody's Investors Service downgrades the rating on the Metropolitan Opera Association (NY) Series 2012 bonds to Baa1 from A3 on review for possible downgrade. The rating outlook is negative.

SUMMARY RATING RATIONALE

The downgrade to Baa1 from A3 under review incorporates the Metropolitan Opera Association's weakened financial profile, with a deep operating deficit in FY 2014 leading to a marked decline in unrestricted liquidity. As a result, the opera increased use of an operating line of credit. Further, the Met has granted or is in the process of granting the bank a secured interest in two paintings as well as a portion of its investments, effectively subordinating the interests of unsecured bondholders.

The rating and negative outlook also acknowledge that the opera is better positioned to manage expenses with new union wage concessions. While the Met has developed a five-year plan to improve liquidity and move to operating equilibrium, that plan remains unproven and dependent on donor support for annual operations as well as endowment. It also requires measured box office revenue growth and heightened expense management.

The Metropolitan Opera's credit strengths supporting the Baa1 rating include its global brand driving very strong philanthropic support from a high profile and engaged board, with average gift revenue of $152 million per year. While the Met has total cash and investments of approximately $300 million, most of those assets are donor restricted. Key credit challenges remain a history of operating deficits with elevated endowment spending, meager and declining unrestricted liquidity, constrained expense flexibility with high reliance on unionized labor and considerable pension obligations adding to future expenses.

STRENGTHS

*The Metropolitan Opera enjoys a favorable market position as the largest performing arts organization in the United States. Its market reach and brand benefit from a global initiative to stream live events to movie theater audiences around the world.

*The Met benefits from uncommonly high donor support with average gift revenue of $152 million per year for the three fiscal years ended July 31, 2013 , much of which is unrestricted. The board's support for the refocused emphasis on endowment fundraising will be crucial to long-term credit health.

*Wage concessions achieved through union negotiations in 2014 yielded a 5% reduction in overall pay and benefits over the four year agreement.

*The opera has manageable operating leverage with fiscal 2013 debt to operating revenues of 0.32 times. The long term debt is fixed rate with level debt service equating to 2% of annual operating expenses.

CHALLENGES

*The Met has low flexible reserves with monthly liquidity of $46 million as of FYE 2013 covering just 53 days of cash expenses. Based on our review of preliminary fiscal 2014 results, monthly liquidity without the $17 million draw on the operating line of credit fell in half.

*The opera's history of operating deficits that deepened in fiscal 2014 and elevated endowment spending underscore the sustained discipline that will be required to achieve operating equilibrium.

*The Met's high reliance on gift revenue (50% of Moody's adjusted revenue in fiscal 2013) requires careful stewardship and cultivation of donors as well as organizational alignment with donor interests. While the five-year plans calls for a dramatic increase in endowment fundraising, the organization must maintain substantial flow of current use gifts to achieve balance.

*The opera has historically retained only moderate amounts of gifts in its endowment, resulting in comparatively low endowment levels given the opera's stature and profile.

*By granting its line of credit bank a secured interest in a portion of cash and investments as well as fine art assets, the opera is in the process of subordinating the interests of bondholders in a portion of its assets.

*A large pension obligation depresses net assets and is likely source of material year-over-year growth in cash contributions. The accrued pension liability was $68 million as of July 31, 2013.

*The opera's workforce is represented by 16 unions whose related pay makeup over half of expenses. Workplace rules complicate financial and operational planning for the Met.

OUTLOOK

The negative outlook reflects the potential for further credit deterioration should the opera fail to achieve a more sustainable financial model. Without a rapid turnaround in operating performance, the organization's unrestricted liquidity could erode further. While wage concessions went into effect in FY 2015, the full impact of union and management cuts will not be achieved in the first year of the four-year agreements.

WHAT COULD CHANGE THE RATING UP

The rating outlook could move to stable if the Met is able to rapidly improve operating performance, increase unrestricted liquidity with reduced reliance on its line of credit and remain on track to reaching its endowment growth targets.

The rating could move up through a sustained move to healthy operating cash flow, growth in cash and investments including unrestricted liquidity, and earned revenue growth.

WHAT COULD CHANGE THE RATING DOWN

Downward pressure could result from inability to achieve operating equilibrium with reduced endowment spending, inability to improve unrestricted liquidity, and failure to meet fundraising targets for current use and endowment purposes. Because of the opera's thin liquidity, the rating has a heightened sensitivity to potential material investment losses that would likely mean reduced assets for the Met as well as softened prospects for donor support.

RATING METHODOLOGY

The principal methodology used in this rating was Not-for-Profit Organizations (other than Healthcare and Education) published in March 2014. 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Dennis M. Gephardt
Vice President - Senior 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

Susan I Fitzgerald
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Metropolitan Opera Association (NY) bonds to Baa1; outlook negative
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