This story was initially published at Debtwire.com

The USD 100m debt issuance to fund the Academy of Motion Picture Arts and Sciences museum in Los Angeles leaves some market participants cynical about the project’s essentiality given the use of tax-exempt financing.

The deal is the second debt issuance in five years for a museum devoted to the Oscars award ceremony and Hollywood. The project is set to cost USD 482m and open in December 2020 – more than a year late and USD 100m over budget.

The Academy previously issued USD 340m to finance the museum in 2015, and according to that offering statement, the museum was set to open in spring 2018 and cost USD 388m. The fundraising campaign for the Academy Museum has raised more than USD 368m, according to an Academy spokesperson.

“Muni finance doesn’t have a great history of these museums working out well. There’s wine museums and police museums and Wild West museums, all have sort of fallen on their face,” said Nicholos Venditti, portfolio manager and managing director at Thornburg Investment Management. “This is one of those funny things where munis go outside what the traditional investor thinks a muni is. Issuing tax-exempt bonds to honor Hollywood actors is not the intended purpose of muni bonds, and it’s kind of fascinating.”

The high-profile Newseum shuttered at the end of 2019, and the National Law Enforcement Museum continues to struggle financially, but an Academy spokesperson said their museum is “well-funded, has global brand recognition, and will be the first of its kind in Los Angeles, as well as one of the only museums in the world dedicated to movies and moviemaking.”

Admission revenues are projected to total USD 850,000 each year. Revenue will be generated from paid admissions, the museum store and restaurant, as well as rentals and fundraising. But the primary sources of the Academy’s revenue are the broadcast contracts associated with televising the annual Academy Award ceremony. The museum will offer free admission to visitors 17 and under and provide a complete schedule of admission prices closer to the museum’s opening. 

“Ultimately the bonds are secured by the revenues of the Academy, which is sort of fascinating – where does the Academy get revenue but from television contracts, but they actually get a lot of revenue from TV for the Oscars every year, so the revenue stream is fairly strong, even if no one on Earth goes up to see the Oscar Museum,” Venditti said.

The preliminary offering statement features glamorous shots of Regina King and Lady Gaga clutching their statuettes at the 2019 ceremony, as well as museum renderings. It also notes other high-profile names, including Tom Hanks and Laura Dern, who serve on the Academy Museum’s board.

“I question the sanity of it,” said Marilyn Cohen, CEO of Envision Capital Management. “They’re doing it because they can.”

“People don’t care about the Oscars like they did years ago. Dovetailing in this untimely fashion makes absolutely no sense,” Cohen said. “Having said that – given the appetite for paper, this will go off very smoothly.”

Interest in the Oscars broadcast hit an all-time ratings low of 23.6 million viewers during the ceremony earlier this month.

The Academy currently has USD 352m in debt outstanding, and although the existing debt service schedule is largely flat, totaling USD 14m annually through 2046, a USD 132m principal payment is due on the 2015 bonds in 2021, according to the Academy’s FY19 (ended 30 June 2019) audit.

“The Academy has (more than) USD 500m of unrestricted investments and benefits from significant guaranteed annual broadcasting revenue for the Oscars under its agreement with (broadcasters),” an Academy spokesperson said. “The campaign for the Academy Museum has raised over USD 368m. Very few nonprofits have such strong and diversified sources of revenue to support bondholders.”

The issuance is also being marketed as a green bond, because the Academy is pursuing Leadership in Energy and Environmental Design (LEED) silver certification for the museum building.

It’s questionable whether the Academy Museum is the kind of project that environmental, social and governance (ESG)-minded investors value, Venditti said. For investors who care about ESG, the Academy Museum is a “farce,” he said.

“Even more interesting – these are being sold as green bonds, and in a world where the question about ESG investing seems to be getting more important every day, ‘green bonds’ are certainly becoming a marketing label rather than an actual philosophy around investing, and this deal may be the poster child for that,” Venditti said. “In your heart of hearts, do you believe that investors who legitimately care about environmental issues or social issues or governance issues would believe that a museum for the Oscars – that that would check their ESG boxes? It’s nonsense. It’s only checking the green box because the building is in an LEED-certified building.”

The debt prices Thursday (20 February) and will be issued by the California Infrastructure and Economic Development Bank. Wells Fargo is the underwriter of the deal.

Moody’s Investors Service rates the Academy at Aa2/negative.

by Maria Amante