CHICAGO -- The Indianapolis Museum of Art is coming to market with just under $37 million of refunding bonds as part of a restructuring of its debt portfolio and overhaul of its debt management policy.

The transaction, set for Wednesday and Thursday, is the museum’s first public borrowing since 2004.

“We started over a year ago and set some objectives,” said Diana Hamilton, president of Sycamore Advisors LLC, the museum’s financial advisor.

“We put together a debt management policy that was driven by a desire to restructure and stabilize the debt portfolio.”
As of last year, the museum’s outstanding bonds totaled $122.6 million. The bonds consist of three sets of variable-rate demand bonds with bullet maturities and supported by a direct-pay letter of credit from JP Morgan Chase NA. About half of the debt is hedged by interest-rate swaps, also with JP Morgan Chase. The 2002 bonds that are being refunded this week featured bullet maturities in 2036, 2037, and 2039.

Moody’s Investors Service, which rates the museum A1 with a negative outlook, has said exposure from the debt portfolio is one of the museum’s main credit challenges.

The museum board in late 2012 approved a series of new debt policy goals that included reducing variable-rate exposure, leveling out debt service and amortization, reducing letter of credit exposure and diversifying counterparty risk.

“There weren’t any fire alarms, it was just a larger portfolio restructuring issue,” Hamilton said.

The sale of $36.9 million of fixed-rate bonds, set for Wednesday and Thursday, will be used to refund variable-rate debt originally issued in 2002.

The restructuring will cut the percentage of variable-rate debt in the museum’s debt portfolio to 55% from 100%. It will restructure the bonds originally issued with bullet maturities with level debt service and amortization of principal and reduce the museum’s letter of credit support to $55 million from $122 million.

The transaction comes several weeks after the museum completed a private placement with PNC Bank NA. The $26 million private placement refunded variable-rate bonds originally issued in 2001 and features a 1.27% fixed-rate interest rate through February 2018. The move achieved the museum’s goal of diversifying its counterparties, Hamilton said.

Moody’s revised its outlook on the museum to negative from stable in July 2012 in light of the museum’s exposure to investment returns as well as dependence on donor support for both operations and debt-service payments, the ratings agency said.

“The negative outlook reflects the weakened operating performance as a result of a decline in unrestricted gift revenue and an elevated reliance on investment earnings for operations,” Moody’s said in a report on the upcoming borrowing.

Strengths include a leading market position, considerable financial resources that totaled $337 million in fiscal 2012, an engaged board and the restructuring of the debt portfolio that will lower variable-rate exposure, analysts said.

Roughly $55 million of the museum’s bonds are hedged in interest-rate swaps with JP Morgan and feature expiration dates ranging from 2016 to 2024. As of the end of December, the swaps were valued at negative $5.9 million. None of the debt to be refunded this week is hedged.

RBC Capital Markets is the senior underwriter on this week’s deal. US Bancorp and City Securities Corp. are co-senior managers. Ice Miller LLP is bond counsel.

A prominent cultural institution in the Midwest, the Indianapolis Museum of Art was founded in 1883 and is the 10th largest art museum in the U.S. It sees an average attendance of 412,000 a year.

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