After nearly five years of constant construction and much more still to go, leaders of the Los Angeles County Museum of Art have resolved not to continue until they have socked away an additional $100 million in donations on top of the $320 million in cash and pledges given so far.
A mixed review of LACMA’s recession-buffeted finances issued Wednesday by Moody’s Investors Service lays out the reasons why the museum that opened the Broad Contemporary Art Museum and the BP Grand Entrance in 2008 and the Resnick Exhibition Pavilion in September is stopping for a refueling before pushing ahead.
LACMA officials said early in 2009 that the poor economy had forced them to delay the next scheduled project, carving offices and more gallery space out of LACMA West, a former May Co. department store at Wilshire Boulevard and Fairfax Avenue. But no fundraising threshold had been publicly attached to its resumption until now. (The LACMA West renovation would complete the second part of a three-phase, $450-million construction agenda. The third phase involves unspecified changes to aging buildings on the east end of the campus.)
Although Moody’s did not downgrade the previous A2 rating on $383 million in construction bonds LACMA has issued to pay for its “Transformation” campaign, it forecasts rough going ahead, leading to a drop in the rating’s outlook from “stable” to “negative.”
Although A2 denotes an “upper-medium grade” investment that’s a “good credit risk,” Moody’s pointed to some of the fine print in LACMA’s complex bond transactions in explaining why the outlook, defined as “an opinion regarding the likely direction of an issuer’s rating over the medium term,” has turned negative.
To make its tax-free bonds more attractive to investors, LACMA purchased a guarantee called a letter of credit from a consortium of banks. The banks promised to pay off the bondholders should the museum default; in turn, LACMA agreed to maintain a certain degree of financial liquidity to reassure its bankers that no default would occur. But construction spending has eaten away at the museum’s liquid assets, and the bad economy has stalled the fundraising needed to replenish them.
LACMA is $130 million short of its campaign’s overall goal and $63 million shy of what’s needed to back up its bonds, which don’t start maturing until 2030 but carry projected interest costs of more than $10 million a year.
The measure of liquidity LACMA has committed to is called an Unrestricted Net Assets Ratio. A ratio of 0.95 or more is peachy; under 0.75 means disaster — a default. Since 2008-09, when LACMA’s investment portfolio plunged 23.4% in the global meltdown (it regained 12.6% in 2009-10), the ratio has been in a gray area much of the time. It dipped as low as 0.88 on June 30, 2010, when liquid assets totaled $118.6 million. Now it stands at 0.91, according to Ann Rowland, LACMA’s chief financial officer. Each ratio point equals $3 million to $4 million, Rowland said, meaning that the museum has stayed at least about $40 million clear of defaulting.
There have been some mild consequences: When the ratio, which is calculated each June 30 and Dec. 31, falls under 0.95, the museum has to transfer $12.5 million into a kind of escrow account to reassure the banks, although LACMA still gets to control how the money is invested. But a drop below 0.85, Moody’s said, would pose “a significant credit concern” because it could trigger provisions in which LACMA wouldn’t be able to spend any of its unrestricted funds — those not legally reserved for a donor-specified use — without clearance from its banks.
Rowland said Wednesday that even when its ratio fell to 0.88, LACMA had a cushion of about $12 million to avoid triggering that “significant credit concern.” Everything should be OK going forward, she said, because for the first time in years the museum won’t be spending large sums on architects and contractors, and presumably it won’t be seeing its investments shrinking rapidly amid another round of global market mayhem.
But Rowland and Mark Mitchell, the museum’s budget and investment officer, said it remains important for LACMA to make renewed progress on the capital campaign, which has netted just $9 million since mid-2008.
LACMA will still have $50 million in unspent bond proceeds when the restaurant is finished, Rowland said, but museum trustees have decided not to touch it until they’ve raised $100 million more. Then the planned makeover of LACMA West can begin, with no fear of bond-related liquidity problems.
Rowland said that the “negative” ratings outlook from Moody’s isn’t likely to mean higher interest rates on the museum’s bonds, but Mitchell said the change is “one shot over the bow,” signaling the analysts’ concern about possible consequences if fundraising doesn’t pick up.
On the positive side, Mitchell noted the Moody’s report’s praise for LACMA’s “healthy operating performance” and “prudent fiscal policies,” which enabled the museum to recover from a $400,000 deficit in 2008-09 by posting a $600,000 surplus in 2009-10, largely via a hiring freeze and scaling back exhibitions.
Moody’s also reported that, at $53 million, the cost of the Resnick Pavilion came in $1 million under budget.