OREANDA-NEWS. Fitch Affirms The Nelson Gallery Foundation's (Missouri) Revs at 'AA'; Outlook Stable Fitch Ratings has affirmed its ratings on the following series of cultural facilities revenue bonds issued by the Missouri Development Finance Board on behalf of the Nelson Gallery Foundation (NGF):

--$36.6 million series 2012A at 'AA';

--$25.8 million series 2010A at 'AA';

--$60 million variable-rate demand bonds (VRDBs), series 2008A (underlying) at 'AA';

--$57 million VRDBs, series 2004A at 'AAA/F1+'.

The series 2008A VRDBs are supported by a standby bond purchase agreement (SBPA) provided by The Northern Trust Company (rated 'F1+').

In addition, Fitch affirms its 'AAA' rating on the implied general obligation of the Hall Family Foundation (HFF). The 'F1+' rating is based on internal liquidity of HFF. Long - and Short-Term ratings on the series 2004A bonds are based on an irrevocable donation agreement between HFF and NGF available to support the series 2004A bonds.

The Rating Outlook is Stable.

SECURITY

Revenue bonds are an unsecured general obligation of NGF, payable from all legally available funds.

KEY RATING DRIVERS

HEALTHY FINANCIAL CUSHION: NGF's healthy balance sheet ratios, bolstered by solid annual fundraising and strong community support, continue to underpin the 'AA' rating. The financial cushion is tempered by NGF's high reliance on investment income and philanthropy to support operations, both of which sources are subject to market volatility.

OPERATING MARGIN VOLATILITY: NGF's GAAP operating margin, as calculated by Fitch, has been negative for four of the past five fiscal years (through fiscal 2015), with board designated and endowment funds utilized to balance operations and support annual debt service obligations. The museum's operating budget is on a cash basis.

HIGH DEBT BURDEN: NGF's high maximum annual debt service (MADS) debt burden (including a bullet maturity in fiscal 2038) and significant variable-rate exposure remain credit concerns, although these factors are partly offset by NGF's solid balance sheet resources and lack of additional debt plans.

INTERNAL LIQUIDITY: The 'F1+' rating on NGF's series 2004A VRDBs is based on HFF's ability to cover the maximum potential liquidity demands presented by the series 2004A bonds by at least 1.25x from liquid internal resources.

RATING SENSITIVITIES

BALANCE SHEET STRENGTH: A material deterioration in Nelson Gallery Foundation's (NGF) balance sheet strength relative to debt or operating expenses could negatively impact the rating.

DEBT CAPACITY: Issuance of additional debt without stronger operating margins and increased revenue to support debt service would negatively pressure the rating. At this time NGF reports no new debt plans.

HFF FINANCIAL DETERIORATION: Erosion of Hall Family Foundation's (HFF) internal resources resulting in insufficient coverage of the variable-rate series 2004A bonds, while unlikely, would put downward pressure on the short-term ratings of both HFF and the series 2004A bonds.

CREDIT PROFILES

NGF is a 501(c)(3) organization created in 1954 by the Trustees of the William Rockhill Nelson Trust to acquire art for public exhibition and to own/operate the museum (originally founded in 1933), which is located in Kansas City, Missouri. The museum contains more than 33,500 works of art, and annual attendance has been increasing in recent years. Attendance was about 533,500 in fiscal 2016, up from 358,400 in 2009 (the year after the Bloch building opened).

HFF is a private philanthropic 501(c)3 organization established in 1953, with a mission supporting the community needs of the greater Kansas City area. Its philanthropic focus is on children, youth and families; education; the arts; community development; and other community interests.

In 2004 HFF entered into a donation agreement with NGF, whereby the foundation is responsible for the debt service on NGF's series 2004A VRDBs via periodic charitable donations. Due to this agreement, the rating on the 2004A bonds is based solely on the HFF. At Dec. 31, 2014, the most current audit date, HFF net assets (the foundation audit reports no liabilities) covered the $57 million series 2004A bonds by a robust 15x. This substantial coverage supports Fitch's rating of 'AAA' for HFF's implied general obligation pledge. Debt coverage based on unaudited investments as of April 2016 remains strong.

FINANCIAL CUSHION OFFSETS WEAK MARGIN

NGF's healthy financial cushion remains a key credit strength. Available funds (AF), defined as cash and investments not permanently restricted, was $282 million as of April 30, 2015, the most current audit available. Fitch's AF calculation is conservative as it excludes assets of the separate William Rockhill Nelson Trust (net assets of $65 million at FYE 2015) and trusts held by others (about $19 million).

The Fitch-calculated AF for fiscal 2015 was a strong 706% of NGF's operating expenses ($39.9 million) and an adequate 157% of then-outstanding debt ($179.5 million). When excluding the $57 million HFF-supported series 2004A bonds, the available funds-to-debt ratio improved to 230%. Based on preliminary fiscal 2016 operating results, Fitch expects fiscal 2016 ratios to be slightly weaker - given general market fluctuations - but in a similar range.

Fitch views solid balance sheet resources as an important credit factor given NGF's heavy reliance on board designated and endowment funds to support operations and debt service. NGF operating revenue typically has a high dependence on gifts and net assets released from restriction (37% in fiscal 2015), as well as the endowment draw (29%). Because both of these can fluctuate over time, Fitch views preservation of balance sheet resources as critical to rating stability. Earned income (membership revenue, special exhibition revenues, auxiliary income, etc.) has been growing, but remains a relatively small portion of museum operating revenue (about 28% in fiscal 2015).

HIGH DEBT BURDEN

NGF's pro forma debt burden is very high. Pro forma MADS of about $61.8 million is a very high 209% of fiscal 2015 unrestricted operating revenues. The MADS burden is lower when NGF's $60 million bullet payment (for the series 2008A bonds in fiscal 2038) is excluded. With that adjustment, MADS of about $12.8 million is still a high 43%. Concern over NGF's high debt burden is only partially mitigated by the strong balance sheet cushion and lack of new debt plans.

Total NGF debt was $179 million at April 30, 2015, and is roughly 35% fixed - and 65% variable-rate. Excluding the $57 million series 2004A bonds that are paid by HFF on NGF's behalf, the debt mix is more conservative at roughly 51% fixed - and 49% variable-rate.

As implied by its 'AA' rating, Fitch believes NGF retains sufficient financial flexibility and market access to manage the various risks attendant to variable-rate debt and bullet maturities. However, a prolonged trend of operating deficits on a full-accrual basis that materially erode balance sheet ratios would negatively pressure the rating.

HFF RESOURCES SUPPORT SHORT-TERM RATING

HFF's 'AAA/F1+' rating reflects its substantial balance sheet resources. As of April 30, 2016, HFF's investment portfolio had a market value of about $777 million (unaudited). The portfolio's most liquid holdings, including cash, cash equivalents, U. S. government obligations, and investment-grade corporate debt, were about $122 million (after various discounts per Fitch criteria), providing solid 2.1x coverage of the $57 million outstanding series 2004A VRDBs. For an 'F1+' rating, Fitch expects coverage of at least 1.25x. Supplemental liquidity support is also provided by a standby bond purchase agreement from The Northern Trust Company (rated 'AA-/F1+' by Fitch). However, the short-term rating on the series 2004A bonds is based solely on HFF's self-liquidity.

HFF has no liabilities and the NGF donation agreement is the only bonded debt for which it has direct or indirect repayment obligations.