Issue: Taxable Bonds, Series 2012; Rating: A3; Sale Amount: $100,000,000; Expected Sale Date: 12-13-2012; Rating Description: Revenue: 501c3 Unsecured General Obligation
Moody's Investors Service has assigned an initial A3 rating to the Metropolitan Opera Association's (NY) Series 2012 taxable bonds with a sale amount of $100 million. The outlook is stable.
SUMMARY RATING RATIONALE
The A3 rating reflects the Metropolitan Opera Association's (the Met's) global market position as a leading performing arts organization with an uncommonly large revenue base of $314 million supported by significant donor support that averaged $145 million per year between fiscal years 2009 through 2012. More recently, the Met has been able to diversify and enhance its earned revenue streams through its "Live in HD" series of transmissions begun in 2007 and grossed $30 million of revenue in fiscal year 2012. Given its large revenue base and lack of additional borrowing plans, operating leverage is expected to remain manageable, with pro forma debt to operating revenues of 0.32 times. Credit challenges include softened operating performance in fiscal 2012 and expected for fiscal 2013, a large pension liability, highly unionized workforce, and limited flexible reserves relative to expenses.
*Favorable market position as largest performing arts organization in the United States with revenue base of $314 million in fiscal 2012. Market reach has been enhanced with global initiative to stream live events to movie theater audiences around the world.
*Uncommonly high amount of donor support with average gift revenue of $145 million for the three fiscal years ended July 31, 2012 , much of which is unrestricted.
*Healthy base of cash and investments, $267 million as of July 31, 2012, although only $20 million is free from donor restriction.
*Material expense flexibility with management able to reduce expenditures in line with revenues over time.
*Manageable operating leverage with pro form debt to operating revenues of 0.32 times. All of the debt will be fixed rate with level debt service.
*Low flexible reserves with monthly liquidity of $20 million as of FYE 2012 covering just 23 days of cash expenses. Prior operating deficits have reduced flexible reserves leaving the current management team with a low base. Of the expected $100 million taxable borrowing, $30 million will be used to manage seasonal cash flows needs and reduce reliance on the operating lines of credit.
*Weakened operating performance expected for fiscal 2013 as endowment draw remains elevated.
*High reliance on gift revenue (48% of Moody's adjusted revenue in fiscal 2012) requires careful stewardship and cultivation of donors as well as organizational alignment with donor interests.
*Large pension obligation depresses net assets and is likely source of material year-over-year growth in cash contributions.
*Workforce represented by 16 unions whose related pay and benefits comprised 53% of operating expenses in fiscal 2012. Workplace rules complicate financial and operational planning for the Met.
*Smaller endowment relative to other rated cultural not-for-profits, with donors contributing to near-term programming as opposed to longer-term stability.
The stable outlook is based on Moody's expectation that the Met will maintain its healthy market position, earned revenue momentum and unrestricted donor support. The outlook also incorporates expectations that operating cash flow will be sufficient to cover debt service, that unrestricted liquidity will not materially decline, and that management and the collective bargaining units will maintain healthy relations.
WHAT COULD MAKE THE RATING GO UP
Significantly improved level of financial resources with limited additional debt issuance; increased liquidity; sustained improvement in operating cash flow.
WHAT COULD MAKE THE RATING GO DOWN
Decline in operating performance; material reduction in earned revenue or donor support; decline in unrestricted liquidity including board-designated endowment; substantial increase in debt including elevated use of line of credit; inability or unwillingness to manage costs relative to revenues.
The principal methodology used in this rating was Moody's Rating Approach for Not-for-Profit Cultural Institutions published in November 2004. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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