What Moody's Thinks of MoMA: Analyzing the Top 5 Credit Ratings for Art Museums
The U.S. government was not the only entity to get downgraded by a credit rating agency last week. The credit rating agency Moody's issued a downgrade of the Los Angeles County Museum of Art's bond rating last Wednesday, citing a worry that a market collapse could cause the museum to lose a third or more on its investment portfolio, which could in turn trigger a default.
Not all museums are rated by the credit ratings agencies. Only the largest institutions issue bonds to raise funds, and are then rated by Moody's. The major fine art institutions in the United States that fall into this category include the Museum of Modern Art, the Metropolitan Museum of Art, the St. Louis Museum of Art, the Museum of Fine Art Boston, and LACMA. These museums issue what are called "auction rate securities," which means they issue long-term debt whose interest rate resets on a weekly or monthly basis as it is traded on the markets. This got many of the museums into trouble in 2008-09 because investors, who have the opportunity to bid weekly in some cases,were hesitant to buy the museums' debt after finding out they had put some of their assets into the risky subprime market.
Three years later, the market has bounced back and investors have come back with it. Here is a look at five of themajor museums that Moody's rates, and where they stand financially according to the latest agency reports:
LACMA: A3 (Upper Medium Grade)
As mentioned above, the museum's credit rating just got downgraded from A2 to A3, the lowestlevel of A-rated credit, and the outlook remains negative. Moody's cited $383 million in outstanding rated debt and a risky level of liquidity in a volitile market as reasons for the negative outlook. While the museum enjoys backing by Los Angeles County (itself rated Aa2)and plenty of wealthy donor support, Moody's considers the fluctuations in their debt remains risky. It also has less liquidity than Moody's would like to see. Additionally, the museum's debt-to-revenue ratio is extremely high.Says the report: "debt-to-revenues are 5.1 times in FY 2010, amongst the highest in Moody's rated portfolio." Despite this meager outlook, LACMA director Michael Govan told the Los Angeles Times that the museum's financial resources are in better shape than they were the last time they were rated, in November 2010.
St. Louis Art Museum: Aa3 (High Grade)
The underlying rating for the St. Louis Art Museum was affirmed the lasttime a new issue was rated, on $45 million of new debt issued by the Industrial Development Authority of the City of St. Louisin November of 2009. That new issue, however, only received an A1 rating. Moody's affirmed that public support looked good for the long-term stability of the museum. Eighty-one percent of the museum's $182 million in total finances were "expendable" in 2008, meaning available for use. It was noted that themuseum has strong governance and long-term financial planning. Risks Moody's noted included the museum's substantial expansion plan, which required strong governance and oversight, as well as the fact that a whopping 60 percent of the museum's operating expenses came from city property taxes.
Museum of Modern Art: Aa2 (High Grade)
Moody's rated $57 million worth of new debt in 2010 with a positive outlook and echoed their Aa2 rating for the underlying institution. The agency noted that MoMA has "superior financial flexibility with over $332 million of unrestricted financial resources," and has had solid attendance and record sales at its retail outlets around the city and online. Some of the challenges that Moody's noted were the reliance thatthe museum has on the tourist industry in New York for its operating revenue, and a large amount of debt. The museum at the time had a 2.4 debt-to-operating revenues ratio, but it was also noted that MoMA intended to retire $370 million worth of debt in the next few years.
Museum of Fine Arts Boston: Aa2 (High Grade)
In May of this year Moody's affirmed the Museum of Fine Arts Boston'sAa2 rating on its $185 million in outstanding debt. The agency cited growing attendance, a large endowment, and positive cash flow as reasonsto believe the museum's bonds would remain a stable bet. The new American Wing opened successfully in November of 2010 and since this capital project they have made smart investment decisions in the market for continued financial health. However, Moody's did note that the museum is thin on liquidity and "highly leveraged" (a striking phrase, meaning it carries a high level of debt related to its income). The MFA's debt-to-revenue ratio is 1.7, and the details of their debt repayment plan haven't been totally firmed up.
Metropolitan Museum of Art: Aaa (Prime)
The Met has the best credit rating by far of all major museums in theUnited States. This was last affirmed by Moody's in 2009, even after the agency assumed "a 30% reduction from investment losses and endowment spending" following the 2008 crash. The Met fundraised $138 million in 2008 and boasted almost 5 million visitors. While it was noted that depressed revenues could present a financial problem in the future, Moody's cited relatively few challenges to the museum's rating. It is, in effect, the gold standard of museum bonds — and as of now has abetter rating than the government of the United States of America.
Table of Moody's Ratings
Aa1-Aa3: High Grade
A1-A3: Upper Medium Grade
Baa1-Baa3: Lower Medium Grade
Ba1-Ca: Non-investment Grade (Junk Bonds)
C and below - InDefault