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Moody's Junks Asian Art Museum Over Expiring LOC

Correction: The swap is no longer insured by MBIA. The insurance was dropped when the JPMorgan issued its letter of credit to the museum.

SAN FRANCISCO — The Asian Art Museum in San Francisco faces a deepening financial crisis as its bond rating has been downgraded to junk due to accelerated payments on $120 million of debt.

Moody's Investors Service dropped the Asian Art Museum Foundation's underlying rating to Ba1 from Baa1 as its letter of credit from JPMorgan Chase & Co. was set to expire Tuesday. The expiration was expected to force the bank to make a mandatory tender offer to the foundation's bondholders Monday, triggering accelerated payments of possibly $30 million annually on the outstanding variable-rate revenue bonds, Moody's analyst Diane Viacava said in a note Friday.

Moody's also kept the foundation on its watch for another downgrade. The foundation is the fundraising arm of the museum, which has the largest Asian art collection in the Western world.

"The Ba1 rating reflects the foundation's inadequate financial resources and liquidity to comfortably pay a likely five-year accelerated payment," Viacava said.

The report said the foundation and the city and county of San Francisco are in discussions with JPMorgan and MBIA — the insurer of the bonds through its subsidiary National Public Finance Guarantee — about repayment, which could result in a longer time frame than five years.

The insurer's downgrade during the financial crisis to a level below Aa3 resulted in the foundation posting $20 million in collateral with the bank. With the expiration of the letter of credit, JPMorgan would seize the $20 million.

The $120 million of bonds, which were issued through the California Infrastructure and Economic Development Bank, are also hedged by an interest rate swap with JPMorgan that is insured by MBIA.

A spokesman from JPMorgan declined to comment late Friday on specifics of the deal but said they are still working with everyone involved to reach a solution.

Officials from the Asian Art Museum did not respond to requests for comment.

If the foundation is required to repay the bank bonds in quarterly payments over five years, according to Moody's, its annual payments would hit $29.85 million plus interest, with the first $6 million payment due March 21.

The foundation has $36 million of unrestricted cash and investments that could be liquidated within a month and an additional $19 million that could be liquidated within a year, Moody's said.

The agency said the foundation's modest philanthropic support — $7.8 million in 2009 — and operating margins around 3% would provide little help in making accelerated payments on the bonds.

The foundation has access to a cash-funded debt service reserve fund valued at $7.7 million, equal to one year of debt service. There is no mortgage or deed of trust on the land or building occupied by the museum, Viacava said in the note. Moody's said the foundation did not disclose its draft fiscal 2010 financial statement.

The foundation's operating revenue totaled $27.7 million in fiscal 2009, with $36.7 million of monthly liquidity. Its cash and investments totaled $86.2 million. The foundation has retained bankruptcy lawyer Bruce Bennett, a partner in the Los Angeles firm Hennigan, Bennett & Dorman, who represented Orange County during its 1994 bankruptcy.

Earlier this month, San Francisco city attorney David Herrera sent a shot across the bow of both JPMorgan Chase and MBIA in the form of threatening letters over their involvement in the Asian Art Museum's financial crisis.

Herrera, who is running for mayor of the city, said in the letter to JPMorgan CEO James Dimon that San Francisco would take steps to protect the museum and the public if the bank "continues down its current unreasonable path."

The letter said the bank had a conflict of interest as it was the primary architect of the current financing and serves or has served as the foundation's underwriter, remarketing agent, swap counterparty, investment portfolio manager and letter-of-credit provider.

Herrera said the bank has reaped at least $13 million from the foundation in fees and other charges related to its roles.

The city attorney in its letter to MBIA blamed it for contributing to the financial mess. In a response letter, MBIA said the foundation had interest rates in August 2009 at or lower than before the downgrade and that it could have terminated the swap then for roughly $2.5 million, which now would cost around $18.5 million.

The letter told the bank and the insurer to keep all materials related to the matter. Herrera said in a statement Monday that he has urged the parties to work toward a constructive solution and said he believes the negotiations are continuing in earnest.

The museum is a charitable trust department of the city, which owns the museum building and its collections.

The city and the foundation jointly pay for the museum's staff, facilities and operations. San Francisco issued $40 million of tax-supported general obligation bonds in 2000 to turn the old public library into the museum.

Moody's said its new rating incorporated the city's relationship with the museum and its role in the negotiations.

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