S&P Global Ratings maintains 102 bond ratings in the broad and highly diversified U.S. not-for-profit sector as of April 30, 2021. Entities rated under the non-for-profit criteria include cultural institutions (32%); membership and service organizations (30%); research-related (18%); foundations (12%, the majority of which are private foundations and a few that are operating); and college or university foundations (8%). While the COVID-19 pandemic undoubtedly brought disruption and uncertainty to an otherwise historically stable sector, we believe that a return to stability is likely around the corner given a lower health and safety risk as a result of the vaccine roll-outs, support via the Paycheck Protection Program, strong market gains, good expense management, greater certainty around research funding and decent fundraising even in the midst of the pandemic.

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Given the vast and diverse array of operating models within the rated sector, the ratings spectrum is quite wide, ranging from 'AAA' to 'B+', though the majority (97%) of our ratings are in the investment-grade category. Total debt outstanding for the whole rated sector as of April 30, 2021, was about $18.5 billion, with about $2.3 billion or 12% issued in 2020 and 2021 from four newly rated private foundations who wanted to provide additional grant support given the increased need from the pandemic.

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Within our rated non-profit universe, cultural institutions saw the most significant revenue losses and uncertainty about future income at the start of the pandemic; now as vaccinations are underway and venues reopen, many are preparing for a slow ramp up of revenue, but exercising fiscal caution. Membership and service organization operations were uncertain during the pandemic, and while many remained healthy, others are still working through the challenges of lost revenue related to the pandemic. Many research institutions faced funding uncertainty at the beginning of the pandemic, though we now see that funds had not been cut and many have remained relatively stable and consistent with prior years. Most foundations were fairly resilient as a result of strong balance sheets and prudent expense measures. College and university foundations remained stable. S&P Global Ratings continues to assess entities individually based on the information available to us.

Of our rated universe, approximately 30 entities (or 28%) received a Paycheck Protection Program loan. Over half were for cultural institutions, while the remainder were spread throughout the other subsectors. Many of our rated institutions did not qualify given the maximum 500 employee requirement. The loans are expected to be fully forgiven, although guidance is not yet clear on how to apply for forgiveness. The loans helped institutions to retain staff through a challenging time and stay engaged with stakeholders as everyone figured out ways to adapt to a new operating model.

Cultural Institutions

The majority of the ratings in the not-for-profit sector are held by cultural institutions--organizations with a mission to preserve or promote culture via art, dance, music, etc. to the public. They generate the bulk of their revenues when their doors are open to members and guests. At the height of the pandemic in spring 2020, almost all cultural institutions were mandated by states to close their doors given the social risks posed to public health and safety associated with the community spread of COVID-19. For performing arts institutions, this meant the cancellation of the remainder of the 2019-2020 season. For museums and ticketed venues, this meant immediate closure of operations with no further ticket sales and even some refunds of tickets already sold. Revenues were suddenly cut off, which sent many management teams scrambling to manage expenses--both to offset the projected loss of revenue and to manage payroll and operating costs. Lines of credit were drawn in the short term to improve liquidity while others increased the balances on their lines or sought to secure new lines of credit for defensive measures. Many of the larger, more prestigious institutions turned to donors and started emergency COVID-19 funds to weather some of the operating pressures. Some institutions also budgeted for one-time extraordinary draws on endowment to fund operating gaps.

Our negative outlook revisions in April 2020 on many cultural institutions reflected our uncertainty about how the loss of revenue would impact operations in tandem with potential market volatility and lower fundraising that could affect balance-sheet ratios negatively. Those with ratings and outlooks that did not change were largely institutions that had very little debt or other sources of revenue to offset the challenges brought on by the pandemic. With the national roll-out of vaccinations, the future for cultural institutions is looking brighter, but we believe that operational and financial uncertainty still exists given capacity constraints and the population's own comforts of returning to "normal life" even as capacity constraints are lifted. In the longer term, however, we still believe that demand for the various cultural offerings that these institutions provide remains sound. In our view, a revision to a stable outlook or an affirmation of the rating and outlook will largely depend on management's ability to navigate operations in an environment where ticket/membership sales are unlikely to return to historical levels in the near term. Solutions like emergency fundraising and extraordinary draws on endowment are not sustainable in the long-term, and would not facilitate positive revisions to ratings or outlooks.

Membership And Service Organizations

Ratings on membership organizations, specifically professional membership organizations such as AARP, American College of Physicians, the American Psychological Association, etc., remained largely unchanged as people continued to pay dues and subscribe to various publications, research, and educational products offered by these entities. While conferences and in-person events were cancelled, many organizations were able to offset those lost revenues through expense savings related to travel and operations or to transition to virtual events. Membership and service organizations, such as YMCA, Salvation Army, etc., whose revenues centered on in-person programming and meetings and who have posted consistent operating surpluses in the past were forced to make difficult expense cut decisions to offset lost revenue as a result of closed facilities and limited programming. In most cases, the negative outlooks in this subsector were caused by the operational pressures and ongoing challenges from economic or fundamental business conditions. With the increased roll-out of vaccinations, we believe that some of the revenue may return, although the pace will likely be slow. Near-term rating pressures exist, in our opinion, and longer-term rating stability will depend on operational consistency and balance-sheet cushion, especially relative to debt, as deficits may erode reserves in the short term.

Research

In April 2020, we revised the outlook on many research institutions that rely on public and private sources of funding for operations, given the uncertainty around research funding as many states and the federal government sought to address the immediate needs related to the pandemic. Private sources of funding via individual donations or private foundations were also uncertain given the economic and market concern at that time. Those institutions with ratings that were not affected had research directly related to COVID-19 or other top government priorities such as defense. Since our rating action in April, we have seen resiliency among research funding with minimal cuts. Timelines for research were extended due to the inability to work in labs at the height of the pandemic, but the contracts remain largely in place and unchanged. Private donations also remain largely intact in most instances. We have subsequently revised the outlooks on several of these organizations to stable and we believe a revision to stable and a rating affirmation is very likely for many of the research institutions in the future barring no significant change to the balance sheet or debt profile.

Foundations

Our rated universe of foundations includes both traditional private foundations, which typically take an annual draw from their endowment (on average, 5% of market value) to provide grants or funding for other charitable activities, and operating foundations, which have operations outside of a traditional investment portfolio that affect revenues and expenses. The ratings on private foundations are largely driven by their balance-sheet strength and endowment values compared to debt levels--which, for the most part, remained very stable after the brief March 2020 market blip. Despite economic volatility, investments did not decline tremendously and thus did not have a major impact on the normal endowment distribution used for operations. While many institutions held more in cash than usual at the height of the pandemic, many are now easing back into investments given the strong market performance recently.

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The number of S&P Global Ratings' new issuer ratings increased in 2020 and 2021, as a handful of well-known private foundations came to the market with large debt issuances to make more grants than usual. These organizations, led by the Ford Foundation, recognized the tremendous pressure that was placed on funding and fundraising for smaller entities in the non-profit sector due to the pandemic. Instead of impairing the long-term purchasing power of the endowment by drawing above the standard 5%, these foundations issued debt ranging from $300 million to $1 billion as an immediate way to increase grant making. Collectively, over $2.3 billion of debt was issued by these rated foundations, making up almost 12% of total debt in our rated sector. Many of these institutions viewed this as a one-time immediate need driven by the pandemic and management teams were very thoughtful about the amounts of debt they issued. These four new issuances were all rated 'AAA' with stable outlooks given the strength of the balance sheets and very experienced and prominent management teams of the respective foundations. While private foundations remain susceptible to market volatility, most of the investment portfolios are large enough and highly diversified, such that a change in the rating would be somewhat unlikely absent a significant addition of debt.

Environmental, Social, And Governance (ESG) Factors

Many of the rating actions taken in the sector were the result of elevated social risk due to the risk posed by COVID-19 to public health and safety. However, as the population of vaccinated individuals increase, that risk could come down slowly over time, although the uncertainty still lingers as a resurgence could always emerge. Another aspect of the social factor seen in the sector is the increased issuance of social bonds. The Andrew Mellon Foundation, Ford Foundation, Kellogg Foundation, and the California Endowment all specifically issued social bonds, highlighting to the market that the purpose of the bonds was to support various social causes. We believe issuance of social bonds may gain popularity as market demand for ESG bonds increases and organizations themselves want to highlight the work they are doing in the related area. Environmental and governance risks are in line with our view of the sector as a whole.

Uncertainty around the longer-term financial and social impact from the COVID-19 pandemic remain; however, we believe that there is a lot more stability compared with one year ago and the future is looking bright for many institutions within the sector as doors that were shuttered begin to reopen.

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