Philadelphia’s Please Touch Museum Says Hands Off: Muni Credit

Philadelphia’s Please Touch Museum, which says it was the first designed to serve children 7 and younger, encourages guests to bang on painted toads and pull on ropes. It doesn’t want bondholders to grab the items away.

After the 38-year-old institution skipped debt payments totaling $3.6 million since September, the bond trustee last month threatened to sell furnishings and exhibits ranging from original Lincoln Logs to a keyboard that plays as children jump on it. The museum’s plight stems from selling $60 million in tax-free debt in 2006 to outfit a larger facility with the expectation that fundraising would cover the payments.

The non-profit joins municipal ventures across the country planned in better times that fell short of predictions, from an events center in Wenatchee, Washington, to a high-speed Internet network in Burlington, Vermont. The museum financing, which relies on donations and offers few investor protections, probably wouldn’t get done today as buyers would balk, said Alan Schankel, managing director at Janney Montgomery Scott LLC in Philadelphia.

“The financial crisis and the subsequent recession hit projects that were more vulnerable and less seasoned,” said Matt Fabian, managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. “In retrospect, it doesn’t seem like a great deal.”

Crisis Crop

Of the bonds, including Please Touch’s, that incurred defaults and other impairments in Fabian’s database, 43 percent were issued from 2005 to 2007, he said. In the years preceding the financial crisis, some issuers sold bonds with inadequate security features, such as lack of collateral, he said.

Holders of Please Touch debt include Lord Abbett & Co. and New York Life Insurance Co., according to data compiled by Bloomberg through May. The asset managers don’t have its site as collateral.

Philadelphia leases the domed National Historic Landmark building, the only major structure remaining from the 1876 Centennial Exhibition, to the museum, bond documents show. As a result, the options of the bond trustee, U.S. Bank National Association, may be limited to selling items such as 1970s-era Fisher-Price wooden playhouses and a boat that children sit in and rock with a steering wheel.

Ambition’s Consequences

The museum, which opposes selling its collection, could find that its ambition to move to nicer digs may prove fatal.

“I don’t think they can avoid Chapter 11” bankruptcy, Schankel said. “I don’t see any other path.”

Joe Costello, a museum spokesman, referred comment to the institution’s lawyer, Gretchen Santamour, a partner at Stradley Ronon Stevens & Young LLP in Philadelphia. Santamour didn’t return two e-mails asking about the potential for bankruptcy.

Museum officials had for years wanted a facility larger than its downtown site within walking distance of two other family-friendly attractions, the Franklin Institute and the Academy of Natural Sciences.

They settled on Memorial Hall, across the Schuylkill River in sprawling Fairmount Park, because it would help develop West Philadelphia and accommodate higher attendance, according to bond documents. The building, four times larger than the prior site, provides more space for amenities such as birthday-party rooms. The location near major highways and the addition of a parking lot would also attract suburban families, the documents said.

$88 Million

As a condition of its initial 45-year lease with Philadelphia, officials renovated the hall. They also built an addition for a refurbished 1924 carousel that the Smithsonian Institution once kept in storage.

The move -- including $10 million for an aborted relocation to a different site -- cost $88 million, the documents show. Officials then said they received pledges of $47 million, with $25 million coming from the state, and that additional fundraising would cover the rest. The museum’s first sale of municipal debt, in 2006 through the Philadelphia Authority for Industrial Development, garnered a BBB- rating from S&P, the lowest investment grade. The company said at the time that it “anticipates that the museum will continue its steady progress in its capital campaign.”

Recession Debut

Please Touch officials opened the Beaux Arts-style building in October 2008 -- during the recession that began in December 2007.

“Their timing probably couldn’t have been worse,” Schankel said.

While attendance rose to about 555,000 last year from 173,000 in 2006, fundraising sputtered. About two years after the move, officials had raised less than $2 million toward a $88 million goal, according an S&P report in 2011.

Please Touch was up against other city cultural institutions as donors retreated. Finally, museum officials decided to skip a debt payment in September “in order to initiate restructuring discussions with the bondholders,” Santamour, the site’s lawyer, said by e-mail.

Please Touch had enough resources to pay, said S&P, which cut its rating to CC in September, 10 levels below investment grade. That $2.075 million obligation and a $1.49 million March payment were made through debt-service reserves, according to notices on the Municipal Securities Rulemaking Board’s website.

Repayment Demand

Last month, the trustee demanded full repayment of about $58 million in remaining debt, which the museum is unable to meet, S&P said July 1. The company dropped the rating to D, indicating it’s in default. Money is available in funds held by the trustee to make the next payment of $2.16 million due this September under the original schedule, Nick Waugh, an S&P analyst in Boston, said by telephone.

In a letter to Please Touch, Warren Bloom, a lawyer in Orlando with Greenberg Traurig, said U.S. Bank National Association would privately sell the museum’s “furnishings, equipment and exhibits,” excluding loaned items such as the carousel.

Santamour responded that the museum refuses to permit a sale, which she called an “attempt to exercise non-judicial remedies.” Such a move would “be a breach of the peace,” she said in the June 26 letter to Bloom.

Restructuring Option

Instead, she wants a settlement. Please Touch is suggesting a restructuring in which bondholders would be paid annually based on the museum’s fiscal performance.

Bloom didn’t return calls and e-mails seeking comment on the trustee’s plan. Santamour said the museum won’t comment beyond the letters “to avoid jeopardizing ongoing discussions with the bondholders.”

Daniel Solender, who helps oversee $15.5 billion of munis at Lord Abbett in Jersey City, New Jersey, declined to comment, as did Konstantin Shishkin, a spokesman for New York Life.

At least one investor sees the potential for profit. A buyer on July 1 picked up $7.85 million of bonds maturing in September 2036 -- about a third of the total -- for 33 cents on the dollar, Bloomberg data show.

The museum’s predicament surprised Julie Tabor, 35, as she left the building with daughters Chloe, 6, and Sophie, 1, who had spent hours there painting and playing on a July weekday.

“It’s not the cheapest,” said Tabor, of Manassas, Virginia, who was visiting her mother in a Philadelphia suburb. The attraction charges non-members $17 each and $8 to park.

Yet Tabor said Please Touch offers more than other children’s museums she’s visited.

“We love it. You can stay here all day,” she said. “We’re spoiled.”

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