The Los Angeles County Museum of Art received an initial underlying rating of A2 from Moody’s Investors Service on $176.2 million of Series A, B, and C bonds and $200 million of Series 2007 A, B, C, and D bonds.

The outlook on the debt is stable. The bonds are insured by Financial Guaranty Insurance Co. Moody’s noted FGIC’s current financial strength rating is A3 and on watch for possible downgrade.

The museum is in the second phase of a capital campaign to upgrade buildings, exhibition spaces, and parking as it seeks to draw more visitors and become a tourist destination.

LACMA has five variable- to fixed-rate swap agreements with a notional value of $256 million that contribute “an element of risk” that is “manageable” at the current rating levels, Moody’s analysts wrote in a statement. As of Dec. 31, 2007, the termination value of the swaps was a liability of $11.4 million.

The bonds are an unconditional general and unsecured obligation of the museum and LACMA covenants to maintain 0.95 times adjusted-unrestricted net assets relative to debt beginning June 30, 2008. There is an additional bonds test that requires adjusted-unrestricted net assets to equal 0.95 times existing and proposed debt. As of Dec. 31, 2007, the adjusted-unrestricted net assets to debt ratio was approximately 1.2 times.

The museum receives annual direct cash and in-kind support from the county, totaling $14 million last year, according to Moody’s. The museum has a “strongly established relationship” with Los Angeles County through a 99-year funding agreement commenced in 1994.

LACMA receives annual support from the county in the form of direct cash and in-kind payments. In fiscal 2007, the direct cash payments totaled $14 million. The county has also provided $15 million of unrestricted extraordinary support to the museum in connection with its fundraising campaign.

Moody’s noted higher operating costs associated with new buildings may impact LACMA’s operating performance in the near term, although higher admission prices and projected higher attendance may offset increased expenses.

There also is construction risk associated with capital projects in LACMA’s three-phase campus transformation. While fundraising has been strong, significant additional funds are needed to cover the cost of upcoming capital projects.

The museum boasts a collection of over 150,000 works of art from around the world. It attracts between 700,000 and 800,000 visitors per year on average, with annual attendance and membership tending to vary with the popularity of special exhibitions.

The stable outlook is based on expectations that LACMA will continue to enjoy fundraising success, increase its financial resources, and limit additional borrowing. It also assumes capital projects will be completed close to on time and on budget.

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