[New York, NY] – Fitch Ratings has affirmed the ‘A-‘ rating on approximately $12.7 million of outstanding series 2003 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 rating is an underlying rating, given without consideration of credit support provided through a letter of credit issued by Citibank, N.A.
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; historically positive operating margins (despite a small deficit in fiscal 2014) supporting strong balance sheet resources; and low debt burden. The aforementioned are offset by AADF’s heavy reliance on variable and discretionary revenues.
BALANCE SHEET STRENGTH: AADF has significant resources relative to debt and expenses in fiscal 2014 due to fundraising and general market trends. A history of successful fundraising supports strategic capital and program initiatives and endowment growth.
PREMIER REPUTATION: 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 continues 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. These revenue sources are, however, diversified and have historically exhibited positive trends, generally.
OPERATIONS SOFTEN: AADF’s operations generated a small deficit in fiscal 2014 after historically positive margins. Fiscal 2014’s negative margin reflects lower discretionary performance income and growth in performance and touring expense. This is partially offset by growth in gross education revenues, including tuition and fees from the Ailey School and the Ailey Extension, and consistently strong philanthropic support.
INCREASED FINANCIAL LEVERAGE: Failure of 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: Sustained operating deficits, which Fitch views as unlikely, 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.
RESOURCES OFFSET WEAKER OPERATIONS
Available funds, defined as cash and investments less permanently restricted net assets, grew to $79.1 million at the end of fiscal 2014, accounting for 220.1% of expenses and 598% of long-term debt.
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 $61.3 million as of Sept. 30, 2014; 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 and appropriate for an ‘A-‘ rating.
OPERATING STABILITY EXPECTED
AADF’s three main sources of income are consistently performance-based revenues (33.3%), public support (28.7%) and educational activities (24.2%). 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 31.1% and 27%, respectively, since fiscal 2010.
After historically positive operations, AADF’s operating margin declined to negative 2.2% in fiscal 2014, down from positive 3.2% in fiscal 2013, partly due to decreased performance revenues related to fixed touring schedules, 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, in fiscal 2014, fewer total performance weeks were planned due to a three-year booking cycle and performance and touring expense outpaced related revenues largely due to additional expenses associated with expanding the Lincoln Center season.
Management expects fiscal 2015 to return to at least break-even operations. The budget includes a total of 29 performance weeks, which is 4.5 weeks more than fiscal 2014 and supports the 10.2% increase in performance revenue projected. Fitch notes that the foundation’s inability to return to balanced operations as planned, due to a decline in revenue, without offsetting expense reductions, could negatively impact operating performance and the rating.
DECLINING BUT ADEQUATE DEBT COVERAGE
A decline in operating net income in fiscal 2014 generated lower, but still adequate, MADS coverage of 1.3x, down from 2.8x in fiscal 2013. AADF’s debt burden remains low at 3.4%, given that the foundation generally self-funds capital projects with donor support.
Capacity constraints at the Ailey school will require an expansion of the facility funded with the series 2003 bonds. This expansion is still in the planning and approval stages. While a large portion of the project is expected to be self-funded, Fitch is unable to ascertain if there will 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.
In fiscal 2015, AADF expects to reevaluate its entire capital structure, which is composed entirely of hedged variable-rate debt and supported by a letter of credit issued by Citibank (expiring in Dec. 2016). The foundation synthetically fixed the interest rate on the bonds with a fixed payer swap, also with Citibank (expiring in Nov. 2016).
At Dec. 31, 2014, the current mark-to-market valuation for the swap was negative $0.994 million, which does not require a collateral posting. Fitch does not view the swap termination as a credit concern at this time as the likelihood of a termination event payment is remote given the current rating and the short duration left on the swap.
Additional information is available at www.fitchratings.com.
(Photo of Alvin Ailey Dance Company by Andrew Eccles)