Fitch Affirms Kimbell Art Foundation (TX) Revs at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA' rating on $60.8 million in outstanding Orchard Cultural Educational Facilities Finance Corporation revenue bonds (the bonds) issued on behalf of Kimbell Art Foundation (KAF, or the foundation).

The Rating Outlook is Stable.

SECURITY

The bonds are general unsecured obligations of KAF.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA' rating is underpinned by KAF's significant balance sheet resources, substantial oil and gas revenues, which drive strongly positive operating performance and strong debt service coverage, and a highly experienced management team. Offsetting credit concerns include limited revenue diversity and a high debt burden.

OIL/GAS RELIANCE PARTIALLY MITIGATED: Oil and gas revenues account for the vast majority of the foundation's annual operating revenues as calculated by Fitch. The stability and depth of KAF's interests, and minimal operating and capital risks, reduce credit concerns regarding this high reliance. Oil and gas interests continue to generate stable levels of income eliminating the need to draw upon financial resources for operating support.

SUBSTANTIAL BALANCE SHEET CUSHION: KAF's cash and investment balances (excluding oil and gas holdings and art and library collections) provide considerable financial flexibility to manage unexpected interruptions in revenues or expenditure spikes.

HIGH BUT MANAGEABLE DEBT BURDEN: KAF's pro forma debt burden is high, but consistently strong debt service coverage from operations, level debt service, the lack of variable rate and additional long-term debt, coupled with minimal future capital needs offset this risk.

RATING SENSITIVITIES

FINANCIAL CUSHION: An inability to generate strong surpluses and maintain substantial balance sheet resources could negatively influence the current rating.

INSTABILITY IN OIL/GAS REVENUES: An inability to generate stable levels of royalty income for operating support, without a commensurate increase in other operating revenues, and maintain adequate debt service coverage at or above the current level could negatively impact the rating.

CREDIT PROFILE

Founded in 1936, KAF is a nonprofit corporation tasked with maintaining an institute to promote the study and appreciation of art in Fort Worth, Texas. In 1972, KAF constructed the museum and has owned and operated it ever since. In November 2013, KAF completed its museum expansion project and opened the Piano Pavilion. The museum contains more than 350 works of art in its permanent collection, continuing to pursue quality over quantity. Annual attendance totaled 227,653 in fiscal 2013, down slightly from 257,171 in fiscal 2012, but ahead of prior years.

SUBSTANTIAL RESOURCE BASE

KAF's healthy financial cushion remains one of its key credit strengths. Consistent profits from the foundation's oil and gas properties drive significant annual operating surpluses which bolster financial resources. KAF's available funds (defined by Fitch as cash and investments not permanently restricted) totaled $207.2 million at the end of 2012, excluding $16.68 million in investment sales receivable, $191 million in oil and gas holdings and $1.63 billion in art collection and library holdings from the calculation.

Following a $34.5 million decrease in securities investments in fiscal 2012, available funds covered fiscal 2012 operating expenses ($21.8 million) by a substantial 948% and outstanding pro-forma debt ($103.8 million) by a solid 199.6%. Pro-forma long-term debt outstanding totals $104 million, including $43 million of short-term variable rate debt outstanding (LIBOR-based) under bank facilities used for project completion and for the acquisition of artwork. The bank facilities are expected to be extended at their stated maturities according to management. When excluding the bank lines, the available fund-to-debt ratio improves significantly to a solid 340.8%. Moreover, unaudited estimates for 2013 indicate that available funds remained relatively stable at $209.1 million, but resulted in slightly lower liquidity metrics for fiscal 2013 (fiscal year end December 31, 2013), with available funds covering 723.1% of operating expenses and 201.5% of pro-forma debt.

KAF's exposure to less liquid alternative asset classes, such as private equity and hedge funds, totaled an estimated 52.2% in fiscal 2013 (unaudited), slightly above fiscal 2012 levels (48.7%). If Fitch adjusts available funds to exclude these investments, available funds is significantly lower in fiscal 2012 at $107.7 million which results in lower liquidity metrics. Unaudited fiscal 2013 available funds are slightly lower at $102.5 million.

Adjusted available fund to operating expenses is still substantial at 493.1% and 354.6% for fiscal 2012 and unaudited fiscal 2013, while the adjusted available fund-to-debt ratio is significantly lower at 177.2% and 119.1%, respectively. Fitch still views these levels as adequate at the 'AA' category rating level.

SIGNIFICANT SURPLUSES; HEAVILY RELIANT ON OIL AND GAS

KAF's oil and gas properties continue to generate significant revenues (76.6%) in fiscal 2013 (unaudited), but reliance on oil and gas revenues is lower than in prior years (86% in fiscal 2012). Oil and gas properties generated an average $26 million annually for KAF between fiscal 2009 and 2013 (unaudited), comprising a considerable 84.2% of operating revenues on average over the five year period. Activity-based revenues, including attendance fees, box office receipts, and net museum shops and food service sales, are not significant funding streams. Nonetheless, growth in these streams over time will enable KAF to reduce its reliance on oil and gas royalties.

Oil and gas revenues declined 15.5% in fiscal 2012 to $23.2 million which is the primary driver of the narrowing operating margin in that year. While KAF's operating margin narrowed in fiscal 2012, it remained strong at 24.5%, compared to the 44.2% margin in fiscal 2011. Fitch includes expenses tied to KAF's oil and gas investments as operating expenses. A significant one-time gift of art and growth in oil and gas revenues in fiscal 2011 drove the healthy margin in that year.

Unaudited fiscal 2013 results reflect growth in gifts and contributions received which are attributable to KAF's fundraising efforts under the newly established Cornerstone Society. Further, oil and gas revenues grew 11.6%. However, operations narrowed further to 17.4%, which is due to a significant increase in program services expense associated with the museum expansion.

The foundation's primary risk regarding its oil and gas holdings is price volatility, which KAF manages (but does not eliminate) through forward commodity swap contracts. Capital and operating risks are largely borne by the property owners, with KAF simply receiving a share of generated revenues. KAF regularly assesses the quality of its oil and gas holdings, consisting of net profit interests (averaging $5.67 million annually between fiscal 2008 and 2012) and producing royalties (PR). Based on unaudited 2013 results, income from net profits interests (NPI) is slightly lower principally due to capital expenditures incurred on the redevelopment of certain oil interests. Since the completion of that redevelopment, KAF is yielding increased cash flows from NPI according to management.

Performance for all oil and gas producing royalty revenues continues to exceed projections presented to Fitch, offsetting the decline in NPI in fiscal 2013. According to management, KAF is still acquiring oil and gas royalty properties and achieving higher volumes as a result of those acquisitions. In addition, the existing oil wells from the 1950's continue to produce at high levels today as a result of continuing technological advances.

A recent PR assessment (January 2014) forecasts $145.3 million of cash flow through fiscal 2022 ($16.1 million on average annually over the nine year period) in a base case scenario with no new drilling. This base case projection is up from the January 2010 estimate of $89.0 million ($9.9 million annually) over the same timeframe. Given the generally conservative assumptions underpinning the PR assessment, and historical trends, Fitch views the cash flow forecast as reasonable.

SUBSTANTIAL LEVERAGE

Expansion of the Kimbell Art Museum (the museum), financed by the series 2010 bonds, was completed in November 2013. KAF's pro-forma debt burden, measured by maximum annual debt service (MADS) as a percentage of fiscal 2012 total adjusted operating revenues, is high at 17.6% and excludes the bank facilities. For fiscal 2013, based upon unaudited results, the debt burden declines slightly to 14.5%. Offsetting the magnitude of this debt burden, to some extent, is the strength of debt service coverage. While higher in prior years, KAF's coverage of projected MADS ($5.1 million, in fiscal 2020) on a pro-forma basis exceeds 2.0x). Furthermore, KAF's strong balance sheet cushion and lack of additional debt plans or major capital needs mitigates some of this concern.

At its current rating, KAF maintains sufficient leverage capacity to support the bank facilities. Fitch expects that KAF's substantial balance sheet resources and significant annual profit enable KAF to repay the bank obligation quickly; however, management currently expects to roll-over the bank lines for the near term. There are currently no repayment terms with the bank.

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

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated June 3, 2013;

'Nonprofit Institutions Rating Criteria', dated June 7, 2013;

'Fitch Affirms Kimbell Art Foundation's (TX) Revs 'AA'; Outlook Stable', dated May 31, 2012.

Applicable Criteria and Related Research:

U.S. Nonprofit Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709091

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

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Contacts

Fitch Ratings:
Primary Analyst
Nancy Faingar Moore, +1-212-908-0725
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Colin Walsh, +1-212-908-0767
Director
or
Committee Chairperson:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings:
Primary Analyst
Nancy Faingar Moore, +1-212-908-0725
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Colin Walsh, +1-212-908-0767
Director
or
Committee Chairperson:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com