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Rating Action:

Moody's revises Smithsonian Institution's (DC) outlook to stable from negative; Aaa affirmed

25 Sep 2014

$204M rated debt

New York, September 25, 2014 -- Moody's Investors Service revised the outlook on the Smithsonian Institution's (DC) $204 million of rated debt to stable from negative. At the same time, we affirmed the existing Aaa and VMIG 1 ratings.

SUMMARY RATING RATIONALE

The outlook revision reflects the reduced likelihood of a substantial cut in federal funding as well as management's demonstrated ability to budget effectively while implementing strategic initiatives. The stable outlook also reflects an increase in philanthropic support that will fund capital facilities and reduce debt.

The Aaa rating reflects the Smithsonian's unparalleled role as an educational attraction in the nation's capital, substantial balance sheet with $1.8 billion in total cash and investments, track record of sound operating performance, and low debt burden. Challenges include high reliance on federal funding, limited liquidity relative to $1.2 billion of expenses, and ongoing need to invest in capital facilities.

The VMIG 1 ratings on the Series 2013B, 2003A and 2003B Revenue Bonds reflect the standby bond purchase agreements with The Northern Trust Company (rated A1/P-1).

STRENGTHS

*The Smithsonian maintains sizeable total financial resources, with $1.2 billion at fiscal year-end 2013. From the vantage point of the non-federal trust funds that support debt service, expendable financial resources of $1 billion cushion debt by 4.9 times.

*The Smithsonian serves a unique role as national museum and research system with a long history of strong funding from the federal government. Its exemplary market position is characterized by broad audience appeal with over 30 million visitors in 2013.

*The Smithsonian has solid prospects for ongoing donor support. Total gift revenue averaged $188 million per year in fiscal year (FY) 2011 through 2013, as momentum builds for a planned comprehensive campaign.

*The institution has a highly manageable debt burden with pro forma debt to operating revenue of 15% and debt service to operations of only 0.2%. Federal capital support combined with private gifts have limited the Smithsonian's need to borrow to meet capital needs.

*The institution has a history of consistently healthy operating performance with a three-year average operating margin of 8.3%.

*The Smithsonian has considerable expense flexibility with potential to adjust hours of operation and staffing should operating revenue decline.

CHALLENGES

*The Smithsonian has a relatively thin cushion of financial resources to operating expenses for the Aaa rating category. Expendable financial resources cover expenses by 0.7 times. The non-federal trust funds portion of the Smithsonian's expendable financial resources, however, cover trust expenses by a stronger 2.1 times.

*The complex organization with broad array of programs and enterprises requires careful management and balance of competing interests. Maintaining the vast collection and exhibition spaces entails considerable expense.

*With high reliance on federal funding, the Smithsonian's operating health remains closely linked to its federal funding.

*The increasing level of non-cancelable operating lease commitments drives Moody's calculation of indirect debt to $321 million, offset by history of direct federal support for approximately 75% of the lease costs combined with appropriation-related termination options.

Outlook

The stable outlook reflects our expectation that the Smithsonian will achieve strong operating results supported by increasingly diverse revenue and that federal support for operations and capital will at least remain flat. The stable outlook is also predicated on the ability to maintain earned revenue momentum as well as donor support.

WHAT COULD MAKE THE RATING GO UP

Not applicable

WHAT COULD MAKE THE RATING GO DOWN

The rating could be pressured if the Smithsonian exhibits operating difficulty through reduced federal support for operations or capital. Other potential drivers include decreased donor support, decline in visitation, reduction in flexible reserves, or increase in financial leverage.

METHODOLOGY

The principal methodology used in this rating was Not-for-Profit Organizations (other than Healthcare and Education) published in March 2014. The additional methodology used in the short term rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in May 2013. Please see the Credit Policy 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 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

Edith F Behr
VP - Senior Credit Officer
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 revises Smithsonian Institution's (DC) outlook to stable from negative; Aaa affirmed
No Related Data.
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