Fitch Rates the Whitney Museum of American Art, (NY) Revenue Bonds 'A'; Outlook Stable

Thu Jun 23, 2011 3:27pm EDT

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Fitch Rates the Whitney Museum of American Art, (NY) Revenue Bonds 'A'; Outlook Stable

Fitch Ratings assigns an 'A' rating to the following series of bonds to be issued by The Trust for Cultural Resources of the City of New York on behalf of the Whitney Museum of American Art (Whitney or the museum):

--$125 million revenue bonds, series 2011

The fixed rate series 2011 bonds (the bonds) are expected to sell on or about July 11, 2011 via a negotiated sale. Proceeds of the bonds will partially fund the construction of a new facility, fund capitalized interest, and pay various costs of bond issuance.

The Rating Outlook is Stable.

RATING RATIONALE:

--The 'A' rating is based on the Whitney's preeminent reputation as a museum of 20th and 21st century American art; track record of balanced operations; history of successful fundraising, which has enabled the museum to fund capital improvements and build financial resources over time; and highly experienced management team adept at financial planning.

--Counterbalancing the aforementioned strengths are various construction and implementation risks associated with the Whitney's capital project involving the expansion of the current museum to a newly constructed site in downtown New York City; fairly limited revenue diversity, with much of the museum's operating budget dependent upon fundraising activity; and the potential, albeit minimal, for delayed ramp up in museum visitation and membership activity given its new location away from its core patron base.

--Reflective of management's conservative debt posture, pledges have been received for 100% of the actual construction costs associated with the project and the museum is continuing to raise capital campaign funds for the endowment component to help offset the expected increase in expenses given the new museum's larger footprint, among other purposes.

--The experienced team managing the project and the Whitney's productive working relationship with New York City (rated 'AA'; with a Stable Outlook by Fitch), which is expected to contribute $55 million towards the project and has made development in lower Manhattan an economic priority, partially mitigates the risks presented by the size and scope of the undertaking.

--Although the museum's dependency on fundraising, a discretionary and volatile source of operating revenue, exposes the museum to economic cycles influencing donor giving patterns, sources of such support are diverse and include restricted and unrestricted giving, membership dues, benefit events, and facilities rentals.

--Active and prudent management of the endowment to support continued operations is essential, as endowment spending, as a percentage of operating revenue, is expected to increase from 14% of the total in 2010, to a much larger 29% by 2017.

Key Rating Drivers:

--Timely action on the part of management to ensure the completion of the project on schedule and within budget.

--Continued success in fundraising for project hard and soft costs, and the future operating endowment.

--Maintenance of balance sheet resources at or above current levels to support increased reliance on annual endowment payment.

--Gradual diversification over time of operating revenues following the opening of the new facility.

Security:

The bonds are an unsecured general obligation (G.O.) of the museum, payable from any legally available funds. While there are minimal additional protections afforded to bondholders beyond the broad G.O. pledge, Fitch does not view this negatively given the breadth of the museum's financial resources.

Credit Summary:

The Whitney's management and the board have developed a prudent plan for financing the construction of a new facility expected to transform the museum's exhibition, education and research space. The total project budget of approximately $720 million is comprised of hard and soft costs ($379 million), an operating endowment ($230 million), and indirect project costs ($108 million), in addition to relocation costs that include temporary offices. Fitch views the funding of an operating endowment favorably as this fund will enable the museum to manage the expected increase in costs associated with its new, significantly larger footprint. Fundraising is expected to play a prominent role in funding the project, with the bonds serving as financing to bridge the gap between the receipt of pledges and their conversion to cash. As of June 1, 2011, the museum received $411 million of pledges and approximately $228 million of these pledges have already been converted to cash. As of June 1, 2011, approximately $133 million of restricted funds have been received towards the endowment goal.

The Whitney's historically successful fundraising track record has led to the growth of the museum's balance sheet resources and liquidity. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $33 million at June 30, 2010, representing approximately 109% of fiscal 2010 operating expenses and 26% of pro-forma leverage. Following the sale of real estate in Dec. 2010, an additional $95 million (unaudited) of unrestricted monies was added to available funds, bringing the total to $128 million, approximately 424% of fiscal 2010 operating expenses and 102% of pro-forma debt.

As of March 2011, the Whitney's endowment equaled $207 million. These investments are held in a mix of asset classes, including large cap equity (17.5%), hedged equity (24.3%), and absolute return (19.2%). This does not include an additional $95 million invested in a short-term fund. While overall portfolio liquidity has declined in recent years as a result of an increased allocation to alternative assets, namely hedged equity and absolute return, the museum does not rely upon these holdings (which are invested with a long-term horizon) for working capital or operating cashflow. To supplement its internal sources of liquidity, Whitney maintains a $10 million line of credit; to date the museum has never needed to draw on this resource.

The museum's investment spending policy, equal to 5% of a lagged three year market value average, is standard for the industry. Historically, with the inclusion of this payout, the Whitney's operating performance has been essentially breakeven, with an adjusted operating margin of (0.9%) and 1.3% in fiscal years 2010 and 2009, respectively. Overall, the Whitney's balance sheet resources and available liquidity provide ample flexibility to manage slight variability in operating performance on an annual basis. The museum anticipates repaying the bonds prior to their maturity from the proceeds of gifts and grants. Consequently, concerns associated with the museum's high pro-forma debt burden (21.5% excluding bullets and 37% assuming bullets amortize) are partially mitigated. Given the museum's fundraising track record, the early retirement of debt appears likely.

The Whitney Museum of American Art was founded by Gertrude Vanderbilt Whitney in 1930. The focus of the museum is 20th and 21st century American art and the museum collects, exhibits, preserves, researches and interprets art of the United States. An important part of the Whitney's mission is to foster the work of living artists, and the museum is known for being the artists' museum. Education is another important component of the museum's mission.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Oct. 08, 2010).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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Fitch Ratings
Primary Analyst
Joanne G. Ferrigan, +1-212-908-0723
Director
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Senior Director and Sector Head
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