Coronavirus drives junk-level downgrade to NY's Metropolitan Opera
A shutdown of large public gatherings due to the COVID-19 pandemic cost the Metropolitan Opera Association its investment grade rating.
Moody’s Investors Service downgraded the Met’s Series 12 taxable bonds issued in 2012 two notches to Ba1 from Baa2 Wednesday citing lost ticket sales from the 137-year old Manhattan cultural organization being forced to cancel all performances at Lincoln Center through May 31 as a result of the fast-spreading virus. The new lower junk rating applies to $89 million of outstanding rated debt with Moody’s concurrently revising its credit outlook on the bonds to negative from stable.
“The downgrade to Ba1 and revision of the outlook to negative is driven by the financial impact of the cancellation of Metropolitan Opera's performances through May as a response to coronavirus pandemic,” Moody’s analyst Dennis Gephardt wrote. “Because the opera operates with very thin liquidity including high reliance on an operating line of credit, this social disruption and the public health emergency has a heightened credit impact.”
The Ba1 Moody’s rating is five notches below S&P Global Ratings, which rates the Met at A with a negative outlook. S&P revised the Met’s 2012 taxable bonds to negative from stable last November citing negative operating results last year coupled with the need for increased capital spending.
The Met is one of the largest cultural organizations in the U.S. with operating revenue of $313 million in 2019, according to Moody’s. It was founded in 1883 and moved to the 3,786-seat Lincoln Center for the Performing Arts in 1966
Gephardt noted that while the Met’s payroll expenses will be cut after March, a net impact of expected cash flow losses will likely fall into the $60 million range. The nonprofit will focus on raising $60 million to offset the near-term financial hit, but its already high reliance on a revolving credit agreement for working capital will likely increase even with increased donations, according to Gephardt.
The revolving credit agreement terms poses additional credit risks since it includes a material adverse effect clause and two financial covenants. Gephardt noted that the agreement is collateralized by certain investments and certain artwork with the downgrade factoring in losses in financial markets incurred since July 31, 2019. He said that since more than 80% of the organization's wealth at the end of the 2019 fiscal year was permanently restricted, future losses will have “an amplified impact” with spendable cash and investments.
“The negative outlook incorporates expectations of weakened box office cash receipts in fiscal 2020 and potential increase in debt through an operating line of credit,” Gephardt said. “The outlook could return to stable following a move to a normal season, successful conclusion of the $60 million focused fundraising and maintenance of headroom over financial covenants in the bank line.”
Despite its financial struggles, Gephardt noted that the Met benefits from strong donor support for operations with $175 million in total gift revenue in 2019. The organization is also seeking other revenue growth opportunities including recently adding Sunday performances and increasing streaming services.
Met spokeswoman Lee Abrahamian said the organization began an "urgent fundaising campaign" in response to its shortended 2019/20 season which has already yielded $20 million. She said its newly launched Nightly Met Opera Streams is also being used for grassroots fundraising, with direct paths for viewers to make donations and attracted more than 1.6 million views a week after luanching on March 23.
"While it is disappointing to receive this downgrade as a result of the severe economic implications of the coronavirus pandemic, which is affecting so many arts institutions, the Metropolitan Opera has nevertheless taken a number of immediate actions to stabilize its finances," Abrahamian said in a statement.