Philadelphia Kids' Museum Defaults

The Please Touch Museum of Philadelphia defaulted on almost $59 million in bonds.

The children's museum has the money to make interest payments but chose not to do so because it believes its debt will ultimately have to be restructured, it said.

"For the sake of the museum's long-term health, the bond debt must be restructured, and the board has decided that, rather than waiting and risk creating a financial crisis in several years, it should act now to start a discussion with the bondholders and the city about reaching a solution that works for all parties," Joe Costello, the museum's vice president for external relations and business development wrote in an email.  "Our decision does not impact the operations of the museum and we fully expect to reach agreement on the best way to proceed going forward."

The children's museum sold $60 million in revenue bonds in 2006, using Philadelphia Authority for Industrial Development as conduit issuer, to finance a move to and renovation of an old building that now serves as the museum's home.

Citi was underwriter. The bonds have serial maturities from September 2009 to September 2016 and term maturities from September 2019 to September 2026.

The museum failed to make scheduled Sept. 1 debt service payments to trustee U.S. Bank, N.A., the trustee reported in a notice on the Municipal Securities Rulemaking Board's EMMA website.
U.S. Bank said it made a withdrawal from the debt service reserve fund to make the full debt service payment due to bondholders on Sept. 1.

The $5.38 million debt service reserve fund equals 125% of the average annual debt service, according to the official statement.

Costello said the museum has struggled since 2008 to repay the long-term debt incurred as a result of the move to and renovation of Memorial Hall.

"Indeed, almost immediately after the renovations were completed, the economic recession occurred and the museum, like virtually every arts and cultural organization in the region, was forced to confront significant fundraising challenges that continue today," he wrote.

"The Please Touch Museum continues to be a very popular attraction in the greater Philadelphia region," Costello wrote. "It has become one of the premier children's museums in America and there's no doubt that the move to Memorial Hall has had a lot to do with the museum's continued growth."

Standard & Poor's rated the bonds BBB-minus when they were issued. In July S&P dropped Please Touch to BB-minus. With the default S&P has dropped Please Touch's remaining CUSIPs to D.

In July S&P credit analyst Nick Waugh pointed to several factors in explaining S&P's downgrade of the museum. While the museum launched a new pledge campaign in March 2013, Waugh said S&P believed the rate of pledge and cash collection was not currently sustainable to meet future debt service needs. The debt burden remained "very high" at 22% of fiscal 2012 operating expenses.

Please Touch's Museum Fund, which is used to pay debt service, was low at $10.4 million as of April 30 and was shrinking, Waugh wrote. The museum had an operating deficit of $6.2 million for the fiscal year ending Sept. 30, 2012.

On the other hand, Waugh wrote that the museum has diverse operating revenues and strong attendance figures that in fiscal 2012 were up slightly from fiscal 2011.

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