CHICAGO — The Art Institute of Chicago plans to enter the market as soon as Wednesday to sell a mix of taxable new-money and tax-exempt refunding bonds that will reduce the museum’s floating-rate risks and allow it to accelerate its pension funding plans.
The museum will sell $40 million of taxable bonds and an additional $61 million of tax-exempt debt. The tax-exempt piece will be issued through the Illinois Finance Authority.
Morgan Stanley is the senior manager with Loop Capital Markets LLC and William Blair & Co. also serving on the underwriting team. Prager & Co. is advisor and Orrick Herrington & Sutcliffe LLP is bond counsel.
The museum was not under immediate pressure to increase its pension funding ratios but officials are opting to because the taxable market offers such attractive rates.
“We think it’s a good time,” said museum vice president for finance Eric Anyah.
The infusion of funds from the taxable bond sale will help bring its funded ratio up to 80% from 56% in 2011.
While Anyah calls the issuance “balance-sheet neutral” because the pension obligation is also a debt, the rating agencies note that it does represent a conversion to a direct debt from a less direct obligation.
The tax-exempt refunding will allow the museum to capture traditional present-value savings on fixed-rate bonds being refunded. It also will reduce remarketing and liquidity risks as a portion of the bonds being refunded are in a variable-rate mode with medium terms. All of the new bonds will be in a fixed-rate mode.
Ahead of the sale, Moody’s Investors Service affirmed the museum’s A1 rating and stable outlook while Standard & Poor’s affirmed its equivalent A-plus rating and positive outlook.
”The positive rating outlook reflects our view of the AIC’s balanced operating performance … solid balance-sheet ratios for the rating category and strong institutional leadership and management to produce such results in a stressful economic environment,” S&P wrote.
Cash and investments totaled $806 million in fiscal 2012, equal to 3.8 times operating expenses, and 2.9 times outstanding debt.
The credit also benefits from the museum’s planned reduction of debt through fiscal 2015 as donations are received. The museum anticipates reducing its debt load to about $203 million from $296 million. It paid off $29 million of debt in its last fiscal year as collections come in from its $375 million fundraising campaign for its new modern wing that opened in May 2009.
The museum’s last new-money issuance “was structured to provide bridge financing for the modern wing and the gifts have come in very well,” Anyah said. About 92 % of pledges for the new wing that increased exhibition space by 30% have been collected.
The Art Institute’s challenges include a front-loaded debt service schedule and continuing but manageable budget pressures as the long-term expenses of the modern wing continue to be incorporated into the museum budget.
The rating reflects the “the organization’s solid market position as both a large, internationally known art museum and a nationally ranked art school, double-digit operating cash-flow generation to service debt, and an adequate balance-sheet cushion,” Moody’s wrote.
The museum is challenged by a relatively high leverage and competitive and economic pressures that could impact visitors at the museum and enrollment at its art school.
The museum was established in 1879. Its permanent collection includes more than 300,000 works of works of art, including paintings, sculpture, prints, drawings, photographs, and decorative arts and textiles. It sees more than 1.4 million visitors annually.
Attendance was 1.43 million in fiscal 2012, virtually the same as fiscal 2011 down from 1.8 million in fiscal 2010 when the modern wing opened. The museum’s membership in fiscal 2012 was 90,475.
