NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to approximately $28.4 million of series 2016A revenue bonds issued by The Trust for Cultural Resources for the City of New York (TCR) on behalf of the Alvin Ailey Dance Foundation (AADF).
The fixed-rate bonds are expected to sell via negotiation as early as the week of July 25. Bond par includes $19.45 million in new money to finance expansion of the existing facility operated by AADF and about $8.95 million which will be used to refund outstanding TCR series 2003 variable-rate revenue bonds, and pay costs of issuance.
At the same time, Fitch affirms the outstanding series 2003 TCR revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by general obligation loan payments from AADF to TCR.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'A-' rating reflects AADF's premier reputation and demand for performances; history of generally positive operating margins supporting strong balance sheet resources; and moderately low debt burden. The aforementioned are offset by AADF's heavy reliance on variable and discretionary revenues.
BALANCE SHEET STRENGTH: AADF had significant resources relative to debt and expenses in fiscal 2015 due to fundraising and general market trends. A history of successful fundraising supports strategic capital and program initiatives and endowment growth.
PREMIER REPUTATION BUT NARROW FOCUS: The Alvin Ailey American Dance Theater's (AAADT) long-standing and international reputation and prominent locations at City Center and Lincoln Center in New York City continue to attract a donor base of individuals and institutions that provide substantial financial support. Thus, AAADT experiences relatively stable philanthropic support levels which add to its operating flexibility.
RELIANCE ON DISCRETIONARY REVENUES: AADF is heavily reliant on philanthropic support and performance fees, both of which can vary from year to year, and are discretionary sources of revenue. Within the category, these revenue sources are diversified and have generally exhibited positive trends.
OPERATIONS SOFTEN: Operations are generally positive averaging 3.2% between fiscals 2010-2015. AADF's operations returned a positive margin of 5.2% in fiscal 2015 after generating a small deficit of 1.7% in fiscal 2014 due to lower discretionary performance income and growth in performance and touring expense. However, growth in gross education revenues, including tuition and fees from the Ailey School and the Ailey Extension, diversifies revenues.
INCREASED FINANCIAL LEVERAGE: Failure of Alvin Ailey Dance Foundation (AADF) to grow total operating revenues, despite any decline in performance income, and balance sheet resources to support increasing debt levels may yield negative rating action.
MARGIN DETERIORATION: Though margins are expected to weaken in fiscal 2017 during the construction period, sustained weakening of AADF's operating performance post project completion, while not anticipated, could cause a negative rating action.
AADF has been instrumental in supporting the activities of AAADT, founded in 1958. AADF leverages its prominence and promotes its popularity domestically and internationally in the performing arts community, providing dance performances, community programs and training and education about the inspiration, meaning and significance of Alvin Ailey's modern dance masterpieces reflecting African American heritage.
After recently completing its transition and a strategic plan under its new executive director, AADF's high profile and longstanding board chair retired at the end of 2014. The former chair was key to establishing a sound fundraising culture, which is expected to continue under the new board chair's leadership. The loyal donor base and prominence of the existing board members are viewed as a positive.
STRONG LIQUIDITY POSITION
Available funds (AF), defined as cash and investments less permanently restricted net assets, grew about 25% to $98.8 million at the end of fiscal 2015, accounting for a healthy 262% of expenses and robust 779% of long-term debt. Under the current plan of finance, pro forma debt increases significantly to $28.4 million which reduces this ratio by over half to about 348%, which is still considered strong for the rating category.
AADF's financial resources have grown to healthy levels due to AADF's balanced investment portfolio strategy, successful fundraising and historically positive operations. AADF's endowment grew to about $97.4 million as of March 31, 2016; strong returns and the foundation's 5% endowment spending policy allow for a sustainable endowment draw for operations.
AADF's investment portfolio continues to reflect a balanced approach, despite higher allocations to equities and alternative investments than in previous years, typical of the non-profit sector.
Overall, Fitch believes AADF's liquidity position relative to its current operating and debt profile is strong for an 'A-' rating.
HISTORICALLY POSITIVE OPERATIONS
AADF's three main sources of income are consistently performance-based revenues (32%), public support (21%) and educational activities (22%). AADF has historically demonstrated operating flexibility in a challenging environment as a result of its revenue diversity. The foundation has realized revenue growth from educational activities and performance income which have grown 14.7% and 4.7%, respectively, since fiscal 2011.
AADF's operations are historically positive, averaging 3.2% from fiscal 2010 to fiscal 2015, and increased to 5.2% in fiscal 2015 after a negative margin (1.7%) in fiscal 2014 which was partly due to decreased performance revenues related to touring schedules for that year, and increased marketing and public relations expenses.
AADF performance-based revenues generally offset related expenses, as the foundation has full control over these discretionary expenses and can lower payroll costs for touring personnel in the event of fewer performance weeks. However, fiscal 2014 was an anomaly with fewer total performance weeks planned due to a three-year booking cycle. In addition, performance and touring expense outpaced related revenues largely due to additional expenses associated with expanding the Lincoln Center season.
According to management, fiscal 2016 is on-track to achieving positive operations on a full accrual basis, but modestly lower than the prior year. Management's budget for fiscal 2017 anticipates weaker but surplus operations. Plans to expand the facility will temporarily reduce studio space during the build-out period, negatively impacting enrollment and incur one-time costs for moving some operations off-site. As a result, AADF is budgeting for softer education revenues the same year. Fitch notes that the foundation's inability to maintain positive operations on a full accrual basis once the project is completed in fiscal 2018, could negatively impact the rating.
GOOD DEBT COVERAGE
Operating net income in fiscal 2015 improved and generated good pro forma MADS coverage of 2.3x. With the current financing, AADF's pro forma debt burden increases to a moderate 4.7%, but remains manageable given that the foundation generally self-funds capital projects with donor support.
Capacity constraints at the Ailey school require an expansion of the facility funded with the series 2003 bonds. This expansion is expected to be funded with proceeds of the current financing, which will be fixed-rate bonds, as well as gifts and grants. At the same time, AADF's hedged series 2003 variable-rate debt is being fully refunded under the current financing plan. The foundation's related fixed payer swap will remain in place until maturity in December 2016.
There is not expected to be a need for any future debt issuance at this time. Any additional debt would need to be evaluated to determine the impact, if any, on the rating.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Institutions Rating Criteria (pub. 05 Jun 2015)
Dodd-Frank Rating Information Disclosure Form