Nashville’s Orchestra Maneuvers to Restructure Debt After Flood

The Nashville Symphony, facing a 60 percent decline in donations and $40 million in flood damage to its concert hall, is in talks with Bank of America Corp. to restructure debt issued to build the facility.

The symphony drew on a credit line from the bank last week to buy back $82.3 million of floating-rate bonds from a $102 million financing of the Schermerhorn Symphony Center in 2004, said two people familiar with the matter who asked for anonymity because they weren’t authorized to speak publicly. Forcing Bank of America to put up cash to fund the mandatory buyback will lend a sense of urgency to the negotiations, the orchestra said in a letter posted on its website

“Our preferred course of action is to reach an agreement out of court,” the letter said. “That said, the board understands and accepts its responsibility to act as necessary to protect the assets of the symphony.”

The Tennessee capital is the latest U.S. city with an orchestra in financial turmoil as audiences decline and a new generation of donors gives less money to cultural institutions. Orchestras in Philadelphia, Honolulu and Louisville, Kentucky, filed for bankruptcy protection after the 2008 financial crisis, while the Delaware Symphony Orchestra in Wilmington reorganized outside of court.

Gifts to the Nashville Symphony declined to $14.7 million for the tax year ending July 31, 2011, from a high of $39.1 million in the year ending July 31, 2008, according to the nonprofit’s most recent U.S. tax filing. The value of its publicly traded investments dropped by about $22 million for the year ending July 31, 2011, to about $47 million.

Whittling Down

The symphony lost a combined $40 million in the 2009 and 2010 tax years. It made $12 million in the year ending July 31, 2011.

“Most orchestras don’t break even, and they whittle down their endowment little by little,” said Ted Gavin, a founding partner of the Wilmington, Delaware-based restructuring firm Gavin/Solmonese LLC, who has advised cultural institutions. “The draw from the credit line could easily be explained as being having to meet cash flow because they don’t have donations readily available to meet operating expenses.”

Typically, an organization can use only a percentage of their endowment for annual operating expenses, he said.

Nashville Flood

Construction of the Schermerhorn Symphony Center, which is across the street from the Country Music Hall of Fame, was completed in 2006. Built in a neoclassical style, the 1,844-seat hall, the orchestra’s main venue, can be transformed from concert-style seating to a hardwood ballroom floor for pop and jazz concerts, or events such as weddings. A motorized system lowers rows of seats into a special storage space below the surface of the ballroom floor.

On two consecutive days in May 2010, more than 13 inches of rain fell in Nashville, shattering the previous record. On May 3, the Cumberland River crested at 51.86 feet, almost 12 feet (3.7 meters) above flood stage.

At the height of flooding, 24 feet of water filled the Schermerhorn Center, submerging the lower level and damaging mechanical and electrical equipment, grand pianos and a concert organ.

Investors who tendered their symphony bonds on April 1 received all of the principal and accrued interest. BlackRock Inc., the world’s biggest asset manager, owned $11.4 million of the debt, according to Jim Schwartz, BlackRock’s head of municipal credit research.

Credit Line

The credit line is secured by the symphony’s cash, investments and concert hall, according to a reimbursement agreement filed on the Municipal Securities Rulemaking Board website.

The symphony’s decision not to renew the credit line, which was to expire April 30, means it can’t take advantage of the short-term interest rates near zero. Rates on its floating-rate bonds were 0.15 percent the week of March 28, according to data compiled by Bloomberg.

Laurie Davis, a spokeswoman for the symphony, declined to comment beyond the March open letter to patrons, citing the negotiations. Shirley Norton, a Bank of America spokeswoman, declined to comment. Evelyn Mitchell, a spokeswoman for Regions Financial Corp., trustee for the bondholders, confirmed that the symphony’s bonds were subject to repurchase on April 1. She declined further comment.

Nashville, Chicago, Cincinnati, Rhode Island, and Baltimore are among orchestras that have tax-exempt debt, according to data compiled by Bloomberg.

Last Resort

Nashville’s symphony issued $102 million of floating-rate bonds in 2004 to finance the 197,000-square-foot hall. The municipal government contributed $20 million to the project.

The variable-rate bonds, issued through the Industrial Development Board, were long-term securities offering short-term interest rates because investors could demand their money on short notice and turn the bonds in for sale to another buyer.

To assure investors there would be a buyer of last resort if investors wanted to sell the bonds, the symphony paid Bank of America for a letter of credit.

In 2004, the price of the Nashville symphony’s letter of credit was 0.75 percentage point per year, according to a copy of the agreement posted on the MSRB website. The interest rate the orchestra is paying now couldn’t be determined.

Prices for bank letters of credit have increased after the financial crisis, as banks that provided guarantees sought to conserve capital and reduce risk.

Interest payments of the symphony’s debt totaled about $5.5 million for the year ending July 30, 2011.

Attorney Bob Tuke of Trauger & Tuke, who represents the Metropolitan Government of Nashville and the Davidson County Industrial Development Board, said he’d be surprised if the symphony filed for bankruptcy.

“It would surprise me if people who put so much of their personal capital in as well as their emotion would let it fail,” he said.

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