NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on $60.8 million of auction rate securities (New de Young Museum project) issued by the ABAG Finance Authority for Nonprofit Corporations, CA on behalf of the New de Young Museum.
The Rating Outlook is Stable.
SECURITY
The bonds are joint and several obligations of the Fine Arts Museums Foundation (FAMF), whose primary function is fundraising for the New de Young museum and the Legion of Honor (collectively, the 'museum'), and the Corporation of Fine Arts Museums (COFAM), whose primary function is to operate the museums. The bonds are a general obligation of COFAM and FAMF, specifically excluding the art collection and restricted assets.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'A' rating reflects the museum's sound liquidity level and essentially balanced operating performance, in addition to the diversity of its revenue streams. Offsetting these attributes is the aggressive debt profile; however, the level of outstanding auction rate securities has been significantly reduced and funds have been set aside to repay these obligations.
STABILITY IN APPROPRIATION SUPPORT: The funding derived from the City and County of San Francisco (GO Rated AA, Stable Outlook by Fitch) has remained steady, accounting for approximately 23% of operating revenues over the past five years, providing evidence of the museum's prominence as a major cultural institution and driver of tourism in the city.
RESOURCE BASE SUFFICIENT TO REPAY DEBT: The de Young Fund has been established and currently holds funds sufficient to repay all outstanding auction rate securities (ARS).
FLUCTUATIONS IN MUSEUM ATTENDANCE: The attendance levels at the museums have historically fluctuated, based on the exhibitions, thereby impacting certain revenue streams.
RATING SENSITIVITIES
OPERATIONAL PRESSURES: The museums are dependent upon city appropriations, and should the level of this support decline, there may be negative rating implications.
PRESERVATION OF FINANCIAL RESOURCES: While unlikely, a material decline in the museum's balance sheet, specifically the funds set aside to repay the auction rate securities, could negatively impact the rating.
CREDIT PROFILE
The New de Young Museum and the Palace of Legion of Honor are collectively known as the Fine Arts Museums of San Francisco and are managed by the Board of Trustees of the Fine Arts Museums of San Francisco, a board of the city.
Museum attendance tends to fluctuate depending upon the exhibitions. In 2012, attendance was approximately 1.59 million and 2013 is expected to be comparable, at 1.6 million. While the 2012 level is lower than the level achieved in the three prior years, it still remains significant, ranking the museum fourth in the U.S. in terms of museum attendance, according to data compiled by the Association of Art Museum Directors Annual Statistical Survey.
STABILITY IN OPERATIONS AND FINANCIAL RESOURCES
The museum has a history of essentially balanced financial operations, which has enabled it to increase its financial cushion. In 2012, available funds, defined by Fitch as cash and investment not permanently restricted, totaled $128.5 million. While this level is a reduction from the prior year, the reduction is due to the decision on the part of management to purchase a portion of its outstanding ARS in fiscal 2012, thereby reducing its financial resources. Had those securities not been acquired, the available funds level would have shown growth, above the $210.9 level in 2011.
Even at this reduced resource level, liquidity remains sound, with available funds covering operations by 2.5x and the reduced debt load by 1.98x. The impact of the ARS acquisition is clearly depicted in the change in these ratios. Prior to the acquisition, in 2011, available funds covered operations by 3.84x and debt by 1.4x.
The market value of the foundation's total managed assets, as of March 31, 2013, was $194.1 million, which includes a separate fund designated for debt repayment, the de Young Funds, which totaled $72.4 million. Investments are diversified across various asset classes, including equities, fixed income and alternative investments.
SIGNIFICANT REDUCTION IN DEBT
In the past, Fitch considered the museum's debt profile as aggressive, as 100% of the $143 million portfolio was in ARS. These concerns have been largely mitigated by the reduced amount of securities outstanding, in addition to the organization's prudent management of these obligations and no additional debt plans. Furthermore, a separate fund is in place whose purpose is solely to service these securities.
This debt reduction occurred in fiscal 2012. Due to market conditions which caused failed auctions, the museum's management determined it would be beneficial for the museum to acquire portions of its outstanding ARS. On Oct. 14, 2011, the museum was able to acquire a first tranche comprised of $68.1 million par value of the series 2002A ARS, followed by the purchase of a second tranche on Dec. 14, 2011 comprised of $13.85 million par value of series 2002B and $275,000 par value of series 2002A. Currently $60.8 million of ARS remain outstanding, thereby continuing to expose the museum to interest rate volatility.
DIVERSIFIED REVENUE STREAM
The museum benefits from a fairly diverse revenue stream, of which the largest components include city appropriations (23%), net assets released from restrictions (19%), membership dues (19%) and admissions and special event receipts (16%). Fitch gains comfort from the fact that the largest component, city appropriations, continues to be stable, with a slight uptick in fiscal 2012.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Institutions Rating Criteria', dated June 15, 2012;
--'Fitch Affirms New de Young Museum's Rev Bonds at 'A', June 16, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Nonprofit Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681169
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791706
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