Cher Public

Moody’s blues

Last week, Moody’s Investor Services delivered yet another piece of yet another piece of bad news for the Metropolitan Opera.  They downgraded the Met’s debt offering one grade from “A3” to “Baa1.”  They justified the lowered rating by pointing to the estimated $22 million dollar operating deficit in the fiscal year ending in July 2014 and the Met’s decision to borrow more money using their Chagall murals as collateral.  

None of this, however, is really anything new; the Met’s financial challenges have been widely discussed for months. If anything, the company’s overall financial picture is improving now that the threat of a strike has passed and there is a long overdue commitment to cost reductions.  One can argue that Moody’s did the Met an extreme disservice by issuing their press release at the busiest time of the year for charitable donations.

How bad is this rating? Bloomberg noted it was “three steps above junk”.  First of all, Moody’s broadly divides debt offerings into what it calls “prime” and “not prime” offerings.  From an investment perspective, any “not prime” investment is junk. The Met’s new rating is three ratings above where the “not prime” ratings begin. But there are still 11 different ratings in the “junk” category.

So, this does not mean,  as some have interpreted, that the Met is three steps away  from being placed in the worst possible category of borrower.  Other bond offerings with the same rating as the Met’s are those from Danone (makers of Dannon yogurt and Evian water), Verizon and the Vermont Public Power Supply Authority.   No one believes any of these entities are teetering on the precipice of financial collapse, they just represent riskier investments than bonds from organizations with stronger balance sheets and stronger prospects.

Moody’s has a history of unhelpful debt ratings, so one should not have been surprised by their bad timing.  I’m not saying that the downgrade was not deserved, but it was probably deserved six or more months ago.  Ironically, it would have been helpful to the Met back then when it was struggling to argue for contract reductions.

To make matters worse, the usual Internet Cassandras  treated this as fresh piece of bad news—another nail in what must be a heavily bestudded coffin.  Bloomberg’s headline went so far as to say that  the Met was “burning cash” while providing slim evidence for that position.

All the doomsaying would have been tolerable had it finally engendered a serious discussion about the Met’s long-term financial plan:  What’s the right size endowment for the Met? What should its annual budget look like?   What’s the right balance of ticket revenue, endowment income, and donations? Moody’s reviews the detailed financial statements of many large non-profits; couldn’t it provide some expertise and advice? With some realistic goals, the Met’s board could finally create a plan that donors could support with their usual fervor.  No one wants to dump money on to an already burning pile of cash.

The lesson for the Met in all this is the company  still has to get control of the narrative around its finances.   Perhaps as part of the upcoming announcement for the 2015-16 season, the Met can share its financial strategy and progress on implementing that plan.