CHICAGO — The Cleveland-Cuyahoga County Port Authority will enter the market Thursday with $75 million of fixed-rate revenue bonds to finance part of the Cleveland Museum of Art’s $350 million expansion.
The borrowing will nearly double the museum’s outstanding debt. The bonds will be backed by future donations and a reserve account funded by endowment earnings. The reserve account typically funds art purchases, but a Cuyahoga County court ruled last year that the museum could tap the fund for capital projects.
The debt will finance a chunk of the second stage of a capital program launched in 2005. The expansion includes two new wings, a new atrium, and a renovation of the main 1916 building. CMA officials hope to complete the project by 2013.
Standard & Poor’s downgraded the museum’s outstanding debt ahead of the sale to AA-plus with a stable outlook, from AAA with a negative outlook. Analysts cited operating and fundraising uncertainties amid the capital program and the museum’s heavy reliance on endowment to fund most of its operating budget.
At the same time, Standard & Poor’s noted that the AA-plus rating “remains among our highest for U.S. cultural institutions, reflecting core credit strengths.”
The finance team is expected to enter the market Thursday. PNC Capital Markets LLC and Keybanc Capital Markets Inc. are the underwriters. Squire, Sanders & Dempsey LLP is bond counsel. Public Financial Management Inc. is financial adviser.
The bonds feature a 10-year maturity with payments beginning in 2018.
CMA has $90 million of outstanding bonds originally issued in 2005 to finance the first stage of the capital plan. Like the current issue, officials expect to pay the debt from future donations. The 2005 bonds feature an interest-only payment structure through 2036, with all principal being repaid from 2037 through 2041. The back-loaded structure could mean a debt burden that exceeds 20% of the museum’s budget, Standard & Poor’s warned in a recent report on the downgrade.
The museum has a pair of floating-to-fixed-rate swaps on its 2005 bonds. The original swap, initiated in 2005, matures in January 2014 and requires the museum pay a fixed interest rate of 3.341% and receive 70% of the one-month London Interbank Offered Rate index.
Last December, the museum entered into a second, forward floating-to-fixed-rate swap. The swap will begin next January and expire in January 2021. Under that swap, CMA will pay a fixed rate of 2.286% and receive 70% of one-month Libor. JPMorgan Chase & Co. is the counterparty on both swaps.
