Fitch Affirms New de Young Museum's (CA) Rev Bonds at 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on approximately $143 million of outstanding auction rate securities (New de Young Museum project) issued by the ABAG Finance Authority for Nonprofit Corporations on behalf of the New de Young Museum (the museum).

The Rating Outlook is Stable.

RATING RATIONALE:

--The 'A' rating reflects the museums (or museum, inclusive of the de Young Museum and the Palace of Legion of Honor) growth in attendance and membership; sound liquidity, supported by balanced financial operations and a diverse revenue base; strong management team; and distinguished reputation.

--Offsetting factors include an aggressive debt profile, with all outstanding debt in the auction rate mode; funds available for debt repayment partially mitigates this risk.

--While the museum's moderate dependence on the city and county of San Francisco (rated 'AA-', Stable Outlook) for operating support is a concern, particularly in the current economic environment, this funding stream has been stable over time reflecting the museum's prominence as a major cultural institution and driver of tourism for the city.

KEY RATING DRIVERS:

--Maintenance of balance sheet resources at or near current levels, supported by balanced asset allocation of invested funds and operating performance at or above the break-even level.

--Ongoing stability in the level of support from the City and County of San Francisco, which to some extent, is tied to the museum's ability to maintain its stature as one of the city's principal cultural attractions.

SECURITY:

The bonds are joint and several obligations of the Fine Arts Museums Foundation (FAMF), whose primary function is fundraising for the museums, and the Corporation of Fine Arts Museums (COFAM), whose primary function is to operate the museums. The bonds are a general obligation of COFAM and FAMF, specifically excluding the art collection and restricted assets.

CREDIT SUMMARY:

The museum's track record of break-even to positive operating performance has enabled it to build and maintain a sound financial cushion. In fiscal 2010, available funds, or cash and investments not permanently restricted, totaled $176.5 million, reflecting a 9% increase over the 2009 level. While the museum's resources declined in fiscal 2009 due to the market dislocation, and have not yet rebounded to the 2007 high point, liquidity remains sound, with available funds providing 3.7 times (x) operating expenses and 1.2x outstanding debt. The market value of the foundation's total managed assets, as of April 30, 2011, was $270 million, which includes a separate fund designated for debt repayment. Total investments are diversified across a number of asset classes, including equities, fixed income, and alternative investments. Less liquid alternative investments comprise approximately 13% of the total portfolio.

Operating performance has been balanced (0.4% margin for fiscal 2010), although the margins generated in recent years have been declining due to some variability in expenses associated with increase costs of art acquisitions and exhibitions. Management anticipates that fiscal 2011 will end positive, with a surplus exceeding $1 million, due in part to increased merchandising. Gross profits from the museum store sales do remain a relatively small component of the museum's overall diverse revenue base. The largest components of the base include net assets released from restrictions for operations, which includes gifts (24%), city appropriations (23%); membership dues (16%); and admissions and special event receipts (15%). Gift receipts have fluctuated in recent years, while city appropriations have remained a steady component of the base. According to management, the endowment payout has remained relatively stable.

For an 'A' rated nonprofit institution, the museum's debt portfolio is extremely aggressive, with 100% of outstanding bonds currently in auction rate mode. While market conditions have been favorable in recent years (fiscal 2010 average interest rate of 0.62%), the museum remains highly vulnerable to volatility in interest rates. Partially mitigating interest rate risk on the debt portfolio is a separate fund available for debt repayment.

The de Young Museum and the Palace of Legion of Honor are collectively known as the Fine Arts Museums of San Francisco (Museums) and are managed by the Board of Trustees of the Fine Arts Museums of San Francisco, a board of the city. Museum attendance has continued to experience growth. During the period fiscal 2007 through 2010, attendance at the museums (de Young Memorial Museum and the Palace of Legion of Honor) showed a compound annual growth rate (CAGR) of 11.98%, with 2,349,476 visits in 2010. The membership level also saw strong growth during the same period, reaching 106,308 in 2010, reflecting a CAGR of 10.9%. This level of attendance ranks the museums third in the U.S. Over the past few years there have been several prominent exhibitions contributing to the strong growth in visitations and memberships, including an exhibit which included Van Gogh, Gauguin, and Cezanne.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

--'Criteria for Rating Charter Schools', dated Jan. 23, 2007.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

Criteria for Rating Charter Schools

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=311604

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