CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating assigned to the $29.3 million series 2010 Indiana Finance Authority revenue bonds issued on behalf of the Indiana Historical Society (IHS or the society).
The Rating Outlook is Stable.
SECURITY
The series 2010 bonds are an unsecured general obligation of IHS, payable from all legally available funds. There is a cash-funded debt service reserve at maximum annual debt service (MADS).
KEY RATING DRIVERS
BALANCE SHEET STRENGTH PERSISTS: The 'A' rating remains supported by IHS' very strong balance sheet ratios and indirect support from the state of Indiana (the state, lease appropriation bonds rated 'AA+'/Stable Outlook by Fitch) for utility expenses.
REVENUE CONCENTRATION: Society operating revenues remain highly reliant on endowment earnings for both operations and debt service. There is limited flexibility from earned income and periodic gifts and grants. As such, the society's above average endowment draws are a concern.
HIGH DEBT BURDEN: IHS has a high debt burden of 20%, which while not inconsistent with that of other Fitch rated cultural institutions, limits expense flexibility. This is partially mitigated by unrestricted endowment that exceeds three times outstanding debt.
OPERATING DEFICITS: IHS has reported four consecutive years of operating deficits, through calendar 2013, which have been funded from unrestricted endowment. The society is working to moderate the deficits and the endowment draw over time. At this time Fitch views IHS's significant balance sheet ratio strength as a mitigating factor, allowing a cushion for the organization to manage expenses and return to sustainable long-term endowment draws over time.
RATING SENSITIVITIES
CONTINUED OPERATING DEFICITS: Failure to moderate operating deficits, demonstrate steady progress in returning to a sustainable endowment draw, and realizing modest growth in endowment (on which the society relies heavily for operating income) could lead to a rating downgrade over time.
BALANCE SHEET STRENGTH: Significant declines in available funds ratios - which currently are strong relative to peer non-profit institutions - could trigger a negative rating action.
DEBT CAPACITY: Fitch considers IHS as having no new debt capacity at the existing rating level; there are no debt plans at this time.
CREDIT PROFILE
Located in downtown Indianapolis, IHS was founded in 1830 as a private, nonprofit organization to collect, preserve, interpret, and share Indiana's history. The facility was constructed in 1999 and contains several storage and research facilities, a library, exhibition space, meeting rooms and a theatre. It is located on land leased from the state. IHS' membership base was 5,459 in 2013, with annual attendance of approximately 105,347. The interactive 'Indiana Experience' exhibit opened in 2010. The society has about 125 full- and part-time employees, and senior staff has been stable. Independent board members can number up to 33.
STRONG BALANCE SHEET
IHS' rating remains supported by strong balance sheet ratios and a comparatively large unrestricted endowment relative to operations and outstanding debt. Available funds, defined by Fitch as cash and investments not permanently restricted, was $105 million at fiscal-year end Dec. 31, 2013. Much of IHS' available funds are unrestricted endowment, which represented a very strong 883% of fiscal 2013 operating expenses ($12 million) and 354% of outstanding debt ($29.3 million). Fitch views these ratios as strong for the rating category.
This endowment was $104 million at the end of fiscal 2013, most of which was unrestricted. It was invested in what Fitch considers a fairly standard mix of equities (64%), fixed income (20%) and alternative securities (16%). IHS' endowment had peaked at $122 million in 2007, but unlike most Fitch-rated institutions, the market value has grown but not rebounded to pre-recession levels.
Endowment growth is constrained due to the above average endowment draw rate. In part constraining the endowment was the society's contribution of $10 million to prepay debt in 2010.
IHS' endowment draw is based on a rolling three-year average of market value and, including both operations and debt service, effectively ranged from 5.1% in fiscal 2010 to 6.5% in fiscal 2013. The budgeted effective draw rate for the fiscal year ending Dec. 31, 2014 is somewhat higher at 6.8%. Fitch views this rate as above average and not sustainable long-term given IHS' reliance on endowment spending for over half its annual operating revenue. University and cultural institution endowment draws are typically 4% - 6% of market value. One of the society's 2013-2018 strategic plan goals is to reduce the overall endowment spend rate to 5.85% by fiscal 2018.
OPERATING DEFICITS
Audited IHS operating performance has been negative since fiscal 2010, and Fitch expects similar results for the calendar 2014 budget year based on the society's cash-based operating budget. Fiscal 2013 operating results were negative $1.4 million (an operating margin of negative 13.8%), which compares to negative $1.5 million in 2012, negative $1.98 million in 2011, and negative $846,000 in 2010. This is in contrast to the three years prior to that, when operations were modestly positive.
Management reports that operating deficits (and higher endowment draws to support them) have been caused by increased operating expenses from the Indiana Experience exhibit which opened in 2010, principal amortization of debt, and higher interest expense. Before the 2010 refunding, IHS had variable rate bonds with a very low interest rate and no principal amortization. Receipt or release of gifts can influence operating results. In recent years, IHS has contained expenses while still investing in fundraising activities.
IHS' operating profile remains dominated by endowment-related income. Fiscal 2013 operating revenues included the endowment draw (48%), net assets released from restriction (23%), and non-cash state of Indiana support for utilities (13%). Gifts, membership income and retail sales comprised a relatively small 10% of operating revenues.
DEBT
Debt was $29.3 million at Dec. 31, 2013, all of which is the fixed rate series 2010 refunding bonds, with essentially level debt service. MADS represents a very high 20% of fiscal 2013 operating revenues, which is not uncommon among cultural institutions. Annual debt service was $1.9 million, only slightly lower than the $2.06 million MADS in 2040.
The society's debt repayment plan is currently based on future fund raising and current use of unrestricted endowment, as needed. From an audit perspective, fiscal 2013 net income available for debt service (including the operating portion of the endowment draw), generated MADS debt service coverage of only 0.4x. The balance of annual debt service obligations are paid from unrestricted endowment. Fitch considers IHS's endowment ($103 million) solid relative to outstanding debt ($29.3 million). However, long-term, growing the spending power of that endowment is important as it is the society's major revenue source.
At this time, due to the operating deficits and above average endowment draws, Fitch does not view IHS as having any additional debt capacity at the current rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria'(June, 2014);
--'Nonprofit Institutions Rating Criteria'(June, 2014);
--'Fitch Affirms Indiana Historical Society (IN) Revs at 'A'; Outlook Stable'(August 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749100
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843275
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