Fitch Rts Nelson Gallery Fndn, Missouri 2007A Rev Bnds 'AA'; Outlook Positive.

NEW YORK -- Fitch assigns an 'AA' rating to approximately $98,365,000 Missouri Development Finance Board cultural facilities revenue bonds series 2007A issued on behalf of The Nelson Gallery Foundation (NGF). The series 2007A bonds are scheduled to price in early September via negotiation led by George K. Baum & Company and J.P. Morgan Securities Inc. and are expected to carry 'AAA' municipal bond insurance.

The series 2007A bonds rank on parity with approximately $160 million of outstanding fixed-rate series 2001A cultural facilities revenue bonds (to be refunded) and variable-rate series 2001B cultural facilities revenue bonds. The unenhanced, long-term rating on both issues is also affirmed at 'AA'. The series 2007A, 2001A, and 2001B bonds are general, unsecured obligations of NGF. A standby bond purchase agreement provided by JP Morgan Chase Bank, N.A. continues to support the short-term 'F1+' rating on the variable-rate series 2001B bonds. The Rating Outlook is Positive.

The Positive Rating Outlook primarily reflects NGF's significant growth in balance sheet resources over the past several years bolstered by improved investment performance and significant levels of contributed funds, largely in association with a recently concluded capital campaign. To the extent that NGF can generate current investment returns over a full market cycle, maintain robust levels of giving outside of a comprehensive capital campaign, and rebuild attendance levels and memberships in the wake of recent museum expansion, upward movement in the rating is possible.

In addition, Fitch affirms the implied long-term general obligation (GO) bond rating of 'AAA/F1+' on the Hall Family Foundation (HFF) and the 'AAA/F1+' on NGF's $60 million of outstanding series 2004A variable-rate cultural facilities revenue bonds. Pursuant to an irrevocable donation agreement between HFF and NGF, HFF is absolutely and unconditionally obligated to make charitable donations to NGF in amount sufficient to pay the principal, interest, and purchase price of tendered series 2004A bonds through final maturity (2033). A standby bond purchase agreement provided by JP Morgan Chase Bank is also in place to support a failed bond remarketing. The Rating Outlook on HFF supported bonds is Stable.

The 'AA' rating reflects NGF's substantial level of reserves, demonstrated track record of fundraising, and an experienced management team providing strong programmatic and financial oversight of the Nelson-Atkins Museum (the museum), which is operated by NGF. Also viewed favorably in the rating process were the museum's prominent position as a major cultural attraction within a large and growing region, its increased visibility on a national scale, and the resulting growth of philanthropic support from corporate donors and national grant organizations, among others. The primary credit concerns center principally around revenue dependence on investment income, which makes NGF somewhat susceptible to unexpected financial market events, and fundraising, which is somewhat discretionary in nature. Importantly, appropriate investment management policies and institutional development strategies are in place to temper these risks. NGF's high debt burden is also a credit risk; however, no additional debt not supported by new revenue and/or fundraising is anticipated.

The 'AAA/F1+' reflects HFF's substantial levels of unrestricted net assets, low operating costs, appropriate investment strategy for the its long-term horizon, and lack of existing debt, with no plans to issue or secure additional obligations on behalf of a third party. Credit risks are minimal.

NGF's primary credit strength is its balance sheet liquidity. Available funds, including unrestricted and temporarily restricted cash and investments, increased 97% since fiscal 2001, to $246 million as of April 30, 2006. This level of liquidity represents a very strong 1031% of operating expenses and 102% of pro-forma debt ($240.1 million). Total resources, which include available funds and trusts held by others, totaled more than $371 million, representing 154% of pro-forma debt. Unaudited financial statements for fiscal 2007 indicate available funds will grow an additional 17%, to $288 million, with total resources increasing 13% to $371 million.

Excluding debt service on the series 2004A bonds and amortizing the $30 million bullet payment on the series 2001B bonds (fiscal 2032) over 30 years, Fitch estimates NGF's maximum annual debt service (MADS) would be approximately $12.4 million. While this equates to a high debt burden of roughly 30% for fiscal 2006, available funds provide substantial (6.3 times (x)) coverage. On a current operating income basis, NGF would have covered maximum estimated debt carrying charges during fiscal 2006 and is projected to do so in fiscal 2007. However, in prior years, negative investment returns and/or reduced levels of giving would have yielded less than 1x coverage of MADS.

The reliance on both investment returns and philanthropy for the lion's share of annual operating support underscores the primary credit risk for NGF. Calculated both with and without investment gains and losses, annual operating performance for NGF is largely variable. During years of strong financial market returns and external support, operating surpluses have been quite large. In other years, either negative market returns or reduced contributions yielded sizeable deficits. Importantly, NGF has recently taken steps to reduce portfolio return volatility, including allocating a portion (15%) of its investment pool to alternative asset classes such as hedge funds, and utilizing a two-part endowment spending formula to smooth the impact of market fluctuations. Additionally, while the Generations Campaign concluded in April 2007, raising $373 million of a goal of $200 million, namely to support the expanded museum, annual fundraising and endowment initiatives are on-going.

Declines in both museum admissions and memberships were viewed negatively in the rating process. Neither account for large shares of annual operating revenue; however, they serve an important role in sustaining development activity and attracting new donors. As the June 2007 opening of the new Bloch Building expanded the overall footprint of the museum, its ability to showcase a larger percentage of its collection and thus attract new visitors and supporters is likely.

NGF is a 501(c)(3) organization created in 1954 by the trustees of the William Rockhill Nelson Trust (the Trust). The Foundation operates and maintains the Nelson-Atkins Museum of Art located in Kansas City, Missouri. The Foundation benefits from an annual operating transfer (approximately $2 million) from the Trust each year. Proceeds of the series 2007A bonds will refund approximately $75 million of outstanding fixed-rate series 2001A bonds and fund the renovation of existing museum space designed to enhance the American Art and American Indian Art galleries.

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