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Rating Action:

Moody's revises Nelson Gallery Foundation's (MO) outlook to negative; affirms Aa3 issuer rating; also affirms Aaa/VMIG on Series 2004A

14 Feb 2019

New York, February 14, 2019 -- Moody's Investors Service has revised The Nelson Gallery Foundation, MO's issuer rating outlook to negative from stable. Concurrently, we have affirmed the Aa3 issuer rating and Aaa/VMIG 1 rating on the Foundation's $57 million of outstanding Series 2004A bonds. The outlook for the Series 2004A bonds is stable, reflecting the stable outlook on the Hall Family Foundation.

RATINGS RATIONALE

The revision of The Nelson Gallery Foundation's outlook to negative from stable incorporates two years of weak operating performance with operating cash flow insufficient to cover debt service. Capital spending over the past five years, combined with high debt service costs as well as some onetime expenses in fiscal 2018, have contributed to a decline in total cash and investments and weakening of reserves relative to operations.

The Aa3 issuer rating continues to be supported by a still strong level of liquidity and reserves relative to operations, as well as the gallery's well established position as a leading cultural institution in the Midwest. This strong market position contributes to good philanthropic support for the museum's size. Spendable cash and investments of nearly $300 million continue to cover the institution's small $46 million operating expense base by over 6.4x. Further, very high relative leverage levels, with debt to revenue of 3.9x and debt service to operations of over 20%, are partially mitigated by a donation agreement from the Hall Family Foundation ("HFF", Aaa stable) to cover both the principal and interest on the $57 million of Series 2004A bonds. The Nelson Gallery benefits from its strong local support within the Kansas City region as continual program enhancements have driven favorable gains in both annual attendance and total membership. This growth remains important to improving historically favorable margins as the gallery charges admission for only a limited number of events.

The foundation's high reliance on investment income and gifts to cover operations is a constraining credit factor, particularly in light of relatively limited operating flexibility given a comparatively high fixed cost base. However, a multi-year budgetary framework, the strategic initiative to address its growing retiree liabilities, planned fundraising in support of capital investment and the continued amortization of outstanding non-guaranteed debt, provides some prospect for improvement of financial performance over the medium term.

The Aaa rating on the Series 2004A bonds reflects the unconditional guarantee of payment of both principal and interest by the Hall Family Foundation and other structural factors that provide for complete credit substitution. The VMIG 1 short-term rating reflects both this long term credit quality as well as a Standby Bond Purchase Agreement (SBPA) with Northern Trust Company (Aa3(cr)/P-1(cr)) recently renewed with an expiration date of January 2022.

RATING OUTLOOK

The negative outlook reflects the possibility of credit deterioration if the foundation is unable to improve operating performance or if there is continued deterioration of balance sheet strength

FACTORS THAT COULD LEAD TO AN UPGRADE

- Significant growth in cash and investments providing greater support for both operations and debt.

- Material increase in capital-related fundraising that limits draws on the endowment and improves operating flexibility

- Enhanced revenue diversity and consistently stronger operating cash flow margins

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Inability to improve operating performance and restore formerly strong operating cash flows to provide over 1.0x debt service coverage on a consistent basis

- Continued decline in wealth levels, or reserves relative to operations

- Additional borrowing given already very high leverage levels

LEGAL SECURITY

The issuer rating reflects the unsecured general obligation credit characteristics of the Foundation.

The Series 2004A bonds are secured by a Donation Agreement with HFF that unconditionally obligates HFF to make donations to the gallery equal to the payment of principal and interest on the bonds. Moody's believes the structure of the transaction provides adequate protections and timing provisions so that in the event that HFF does not make its obligated payments, the gallery will have sufficient time to disburse its own funds for this purpose. HFF makes debt service payments directly to the trustee. The donation agreement will remain in full force and effect until such time as the Series 2004A bonds are no longer outstanding and all amounts owed have been repaid. HFF's obligation to pay donations to fund principal on the bonds is subject to a mandatory sinking fund redemption and payment schedule requiring principal payments each year from 2029 to 2033.

The bonds are currently supported by a standby bond purchase agreement (SBPA) with Northern Trust Company (Aa3(cr)/P-1(cr)) recently renewed with an expiration date of January 2022. The Donation Agreement obligates HFF to pay the purchase price for tendered bonds not remarketed or purchased by the bank under the SBPA. Under the terms of the Northern Trust Company SBPA, HFF has six months to redeem the purchased bonds in 10 semiannual installments. A covenant in the SBPA requires that if the HFF's rating falls below Aa3, the Nelson Gallery must use all reasonable efforts to procure an additional credit facility or replace the credit enhancer with an organization rated at least Aa3. Furthermore, if HFF's rating falls below Baa3 or if HFF fails to make debt service payments, that would be considered an event of default and result in termination of the SBPA.

PROFILE

The Nelson Gallery Foundation is a charitable trust created in 1954 by the trustees of the William Rockhill Nelson Trust. The Foundation owns the Nelson Gallery of Art and it owns the 22-acre site on which the Nelson Gallery and Atkins Museum are located, subject only to an easement for the Atkins Museum. The Foundation has continuously and exclusively operated and maintained the museum as one facility and paid all costs and expenses associated with the museum. At FYE 2018, the museum had approximately $400 million in total financial resources and over 540,000 visitors.

METHODOLOGY

The principal methodology used in the issuer rating was Not-for-Profit Organizations (other than Healthcare and Education) published in June 2017. The principal methodology used in the long term rating on the Series 2004A bonds was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017. The principal methodology used in the short term rating on the Series 2004A bonds was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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 credit rating action on the support provider and in relation to each particular credit 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.

Jeffrey Kaufmann
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Susan Fitzgerald
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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