Moody’s Investors Service downgrades the rating on the Metropolitan Opera Association (NY) Series 2012 bonds to Baa1 from A3 on review for possible downgrade. The rating outlook is negative with $100 million rated debt.
The downgrade to Baa1 from A3 under review incorporates the Metropolitan Opera Association’s weakened financial profile, with a deep operating deficit in FY 2014 leading to a marked decline in unrestricted liquidity. As a result, the opera increased use of an operating line of credit. Further, the Met has granted or is in the process of granting the bank a secured interest in two paintings as well as a portion of its investments, effectively subordinating the interests of unsecured bondholders.
The rating and negative outlook also acknowledge that the opera is better positioned to manage expenses with new union wage concessions. While the Met has developed a five-year plan to improve liquidity and move to operating equilibrium, that plan remains unproven and dependent on donor support for annual operations as well as endowment. It also requires measured box office revenue growth and heightened expense management.
The Metropolitan Opera’s credit strengths supporting the Baa1 rating include its global brand driving very strong philanthropic support from a high profile and engaged board, with average gift revenue of $152 million per year. While the Met has total cash and investments of approximately $300 million, most of those assets are donor restricted. Key credit challenges remain a history of operating deficits with elevated endowment spending, meager and declining unrestricted liquidity, constrained expense flexibility with high reliance on unionized labor and considerable pension obligations adding to future expenses.
The Met has low flexible reserves with monthly liquidity of $46 million as of FYE 2013 covering just 53 days of cash expenses. Based on our review of preliminary fiscal 2014 results, monthly liquidity without the $17 million draw on the operating line of credit fell in half.
The opera’s history of operating deficits that deepened in fiscal 2014 and elevated endowment spending underscore the sustained discipline that will be required to achieve operating equilibrium.
The Met’s high reliance on gift revenue (50% of Moody’s adjusted revenue in fiscal 2013) requires careful stewardship and cultivation of donors as well as organizational alignment with donor interests. While the five-year plans calls for a dramatic increase in endowment fundraising, the organization must maintain substantial flow of current use gifts to achieve balance.
By granting its line of credit bank a secured interest in a portion of cash and investments as well as fine art assets, the opera is in the process of subordinating the interests of bondholders in a portion of its assets.
A large pension obligation depresses net assets and is likely source of material year-over-year growth in cash contributions. The accrued pension liability was $68 million as of July 31, 2013.
The opera’s workforce is represented by 16 unions whose related pay makeup over half of expenses. Workplace rules complicate financial and operational planning for the Met.
The negative outlook reflects the potential for further credit deterioration should the opera fail to achieve a more sustainable financial model. Without a rapid turnaround in operating performance, the organization’s unrestricted liquidity could erode further. While wage concessions went into effect in FY 2015, the full impact of union and management cuts will not be achieved in the first year of the four-year agreements
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