Financial Outlook Positive for Arts and Entertainment Groups, Report Says

More and more nonprofit museums, zoos, and other arts and entertainment institutions will be borrowing money to pay for building projects rather than using donations from private sources, according to a new report from Moody’s Investors Service, a major bond-rating company in New York.

As institutions improve their finances by raising investment returns, finding new ways to earn money, and attracting more paying visitors, they will increasingly sell bonds or take bank loans to finance building, expansion, and renovation projects, the report says.

What’s more, the report says, as nonprofit groups turn to banks and bond markets for capital, their increased financial sophistication will attract the interest of investors.

The credit outlook for nonprofit arts and entertainment institutions, the report says, is generally positive, meaning that the groups are likely to be able to cover the debts they may incur.

At greatest risk of default on debt payments, the report says, are institutions that are heavily dependent on state money, small institutions that do not have broad donor support, and institutions that rely on revenue from special exhibits and programs that may vary from year to year.

While recent weaknesses in the economy and stock market may slow fund-raising efforts and reduce investment returns, donor support for arts and entertainment institutions will remain strong over the long run, as will attendance and membership, the report predicts. And, it says, a building boom begun during the last decade by museums and similar organizations is heightening donor interest and audience demand as institutions expand their galleries, update technology, enhance retail and restaurant facilities, and add educational and research centers.

13 Organizations

The report is based on Moody’s analysis of an undisclosed number of nonprofit arts and entertainment organizations that have issued publicly traded bonds or borrowed money from banks — or have indicated interest in doing so — to raise money for capital projects.

The report includes credit ratings for 13 organizations that borrowed money or sold bonds without securing their debt through a bank or bond insurer.

Together, the 13 organizations have more than $1.3-billion in outstanding debt, and earned a median credit rating of A1, meaning half earned a higher credit rating and half earned a lower one. A1 is the fifth-highest rating on a 19-category scale. The lower the rating, the greater the risk an institution will default on its debt.

Of the 13 institutions, the J. Paul Getty Trust, in Los Angeles, and the Smithsonian Institution, in Washington, each earned Moody’s highest mark, Aaa.

The report says that Getty’s endowment, which includes $7-billion in unrestricted funds, provides “wide margins of comfort” that the trust, which operates the J. Paul Getty Museum, can cover its $105-million debt.

The Smithsonian’s rating, the report says, is based, among other factors, on “its No. 1 position among all the nation’s museums in terms of number of visitors,” and “the strong likelihood of ongoing stable federal support.”

Lowest Rating

The San Diego Natural History Museum earned the lowest mark of the 13 institutions, Baa3, 11th on the 19-category scale.

The report says that the museum has a history of operating deficits, “historically weak fund-raising efforts,” and a relatively small number of visitors.

But Moody’s anticipates that the museum, over time, will be able to cover its $15-million debt with returns from its current capital campaign, a growing number of private gifts, and the revenue expected to be generated after the museum completes its expansion.

Moody’s was also optimistic about the museum’s prospects because of its prime location — in Balboa Park, home to 14 museums and art galleries and the city’s well-regarded zoo.

Growing Requests

Moody’s says that one sign of the growing interest in issuing bonds is the increase in the number of credit reports the company has been asked to provide to aquariums, county fairs, golf courses, museums, public libraries, symphonies, theaters, and zoos. And, the report says, the company expects to analyze other arts and entertainment institutions, such as opera companies and public-television stations, as more of those kinds of nonprofit groups consider borrowing money.