LOS ANGELES — Los Angeles County Museum of Art officials say changes to Moody’s Investors Service methodology have more to do with a recent downgrade than anything the museum did.
Moody’s downgraded LACMA’s underlying rating from A2 to A3 on Aug. 10, a move that affects $383 million of outstanding bonds, and retained a negative outlook, partly based on the museum’s high leverage relative to both revenues and balance sheet resources.
The bonds were issued through the California Statewide Communities Development Authority.
Museum officials countered that their debt levels have decreased since 2008 and they think they were downgraded because Moody’s has changed their metrics since 2008.
“We feel that the rating reflects Moody’s change in methodology rather than a change in LACMA’s profile,” said director of communications Miranda Carroll. “We have the same debt level we had in 2008 when Moody’s gave us an A2 rating and in November 2010 when Moody’s reaffirmed our A2 rating. And our debt structure now provides greater stability, diversity and more flexibility in the terms of its covenants and collateral requirements than previously.”
LACMA’s debt-to-revenue ratio is 5.1 times for 2010, putting it among the highest in Moody’s rated portfolio, according to a Moody’s report, which notes the risks inherent in the museum’s variable-rate borrowing strategy.
LACMA restructured its bond portfolio in May, with $200 million in weekly mode backed by a direct-pay letter of credit, and $183 million directly purchased by Wells Fargo Bank and U.S. Bank NA with May 2015 mandatory tenders.
The median debt to operating ratio for cultural institutions in Moody’s portfolio is 1.29 times, while LACMA’s is 5.06 times on that same metric, according to Edith Behr, vice president and senior analyst on Moody’s U.S. public finance team.
The downgrade to A3 reflects ongoing risks in LACMA’s debt structure and liquidity position at a time of elevated volatility in the capital markets, according to the Moody’s report.
“There are a lot of strengths about this art museum,” Behr said. “It is an unusual cooperative institution supported not only by a private board of directors, but also by Los Angeles County. It’s attracting a large number of visitors; it’s an exciting and dynamic museum.”
LACMA’s attendance has increased over the past few years from 600,000 to one million visitors, noted Carroll, the communications director.
Museum officials have poured a lot of money into improving the facilities and improving the exhibits, but they have done it entirely with variable-rate debt, Behr said.
“It’s all variable-rate debt subject to fluctuations of the market,” according to Behr. “The rating action reflected the 100% variable-rate portfolio with limited resources to pay those debts if they were accelerated.”
The municipal market would have to deteriorate by one third before there would be any sort of acceleration in LACMA’s repayment schedule.
Such a development is deemed to be unlikely, but the museum is operating on thin reserves in relation to its debt position, Behr said.
“They would have to reach that for two semiannual periods in a row,” she said. “It is not like if the stock market dropped by one-third in a day that they would have to pay off all their bonds, but they would have fairly little time to correct the situation. They would either have to raise enough money or sell enough to raise money or refinance.”
Among its strengths, the museum has added eight new trustees over the past five years, all of whom must agree to contribute a certain amount of money to LACMA, according to Moody’s.
However, the revenue from trustees has not met the expected targets over the past few years, Behr said.
The facility also receives nearly half of its funding from Los Angeles County, which provided about 44% of the museum’s annual operating budget for the current fiscal year.
Analysts included the county funding mechanism as one of the museum’s strengths.
“They are increasing the size of the board and are trying to attract young board members who have an interest in the arts and who have the means to make contributions that are sizeable,” Behr said. “They are yielding some results, but it’s a process. They are doing well; they are just not doing well enough.
