Fitch Ratings assigns an 'A' rating to the following series of bonds issued by the Indiana Finance Authority on behalf of Indiana Historical Society (IHS):
--$30,500,000 educational facilities revenue bonds, series 2010 (Indiana Historical Society, Inc. project).
The series 2010 fixed-rate bonds are expected to price via negotiated sale the week of Sept. 13, 2010. Proceeds of the bonds will be used to refinance a portion of IHS's outstanding variable-rate demand bonds and to pay costs of issuance.
The Rating Outlook is Stable.
RATING RATIONALE:
--IHS's strong balance sheet liquidity underpins the 'A' rating and offsets a small, fairly concentrated revenue base.
--Experienced management, which is supported by conservative debt and investment policies and consistent financial support from the state of Indiana (lease appropriation bonds rated 'AA+' by Fitch) provide further support for the rating.
--Credit concerns include IHS's heavy reliance on investment earnings derived from its endowment to generate a breakeven to slightly positive annual operating margin.
--While pro forma debt burden remains high, this concern is partially mitigated by the substantial financial cushion provided by IHS's balance sheet and its limited future capital needs.
KEY RATING DRIVERS:
--Continued generation of investment returns at a level sufficient to provide an annual subsidy needed to balance operations, including the payment of debt service.
--Preservation of existing financial cushion through prudent, balanced management of long-term financial assets.
SECURITY:
The series 2010 bonds are an unsecured general obligation (GO) of IHS, payable from all legally available funds. While the security package also includes a debt service reserve, which will be fully funded at closing to maximum annual debt service (approximately $2 million), and an additional bonds test, bondholder protection is derived principally from the broad GO pledge.
CREDIT SUMMARY:
IHS's primary credit strength is its strong balance sheet liquidity relative to debt and expenses. Available funds, defined as cash and investments not permanently restricted, totaled $105 million as of Dec. 31, 2009, up from $89 million as of Dec. 31, 2008. Available funds covered fiscal 2009 operating expenses ($8.3 million) and pro forma debt ($30.5 million) by a strong 1,269% and 344%, respectively. As of June 30, 2010, IHS's available funds balance totaled $97.4 million. Due to its December 31 fiscal-year-end, IHS endured most of its market-related losses during fiscal 2008, when its investment portfolio declined 32% to $86.2 million from $127.6 million as of Dec. 31, 2007. IHS has a fairly conservative investment policy with limited exposure to alternative, illiquid asset classes. Its current asset allocation is approximately 75% equities, 15% fixed income, and 10% alternative investments. Adjusting available funds downward to exclude alternative investments, IHS's liquidity metrics remain solid.
Due to its size and mission, IHS has a small and fairly concentrated revenue base. Investment income is its largest revenue source, representing a high 45% of operating revenues in fiscal 2009. This revenue concentration results in IHS having a high reliance on investment earnings, including endowment spending, to generate positive operations. Including endowment spending, the operating margin was positive for the past three fiscal years, and was a strong 14.5% in fiscal 2009. IHS's other funding sources include state support, membership dues, and contributions.
After refinancing the currently outstanding variable-rate demand bonds ($40 million in aggregate), the $30.5 million of series 2010 fixed-rate bonds will represent IHS's only outstanding debt. The approximately $10 million difference between outstanding bonds and the refunding bonds reflects IHS's retirement of a portion of outstanding bonds with internal reserves. IHS occupies a single-site facility, constructed in 1999 and renovated in 2009, and as such has minimal future capital needs, save minor renovations pertaining to exhibits, and no additional debt plans.
Located in downtown Indianapolis, IHS was founded in 1830 as a private nonprofit organization with a mission to collect, preserve, interpret, and share the state of Indiana's history. It contains collections storage, research facilities, a library, exhibition space, meeting rooms, and a theatre. ISH's membership base is over 5,000, and annual attendance has ranged between 127,000 and 147,000 over the past few years, with the exception of 2009 when a majority of the facility was closed for renovations.
Applicable criteria available on Fitch's website at www.fitchratings.com include:
--'Revenue-Supported Rating Criteria' (Dec. 29, 2009).
Additional information is available at www.fitchratings.com.
Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154
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