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Dipping Into Reserves

CHICAGO — The Lombard, Ill., Public Facilities Corp. drew $1.5 million from reserves to complete July 1 debt service payments on a portion of its $187 million of bonds issued to help finance a hotel and conference center that is struggling to remain solvent.

Reserves were tapped to cover the A and B series payments, while $2 million owed on the project’s C bonds was not paid, according to an investor notice.

With the project failing to ­generate sufficient revenues to repay its debt, village and corporation officials are exploring options to buy more time for business to pick up at the project ­following a failed tender offer this past spring.

The agency invited holders of $144 million of 2005 Series A and C bonds to tender their bonds at a loss while holders of $43 million of Series 2005B bonds — which carry an appropriation pledge from the village — were not part of the tender. Too few bondholders agreed to the ­offering price and the results were rejected by the corporation.

Officials believe the project can succeed if they can better match the project’s capital structure to revised revenue estimates based on a recovering economy and pickup in tourism. Without a restructuring or some other action, prospects remain uncertain. 

“The company has incurred consecutive years of significant losses from operations, continued negative cash flows from operating activities, and was not able to make complete scheduled interest payments during the year ended Dec. 21, 2010,” according to the corporation’s latest audit, conducted by Crowe Horwath LLP.

“These conditions raise substantial doubt about the company’s ability to continue as a going concern,” the May audit added. Whether the company will eventually be able to fully repay its debt depends on its “ability to reduce expenses and improve cash flows.”

The agency covered a portion of its July debt service with project revenues but needed $983,000 from an operating reserve to complete the payment on the Series A bonds and another $277,000 to cover the Series B bonds. An additional $277,000 was used from a second-tier debt service reserve to supplement the payment on the B bonds. No payment was made on the Series C bonds, which lack any reserve or support from the village of Lombard, according to a notice at http://emma.msrb.org/ER485185-ER377341-ER775490.pdf.

“The LPFC can no longer draw on the operating reserve. Now they are eating into the debt service reserve,” said Tom McGuigan, a managing director at Mid-America Hotel Partners, the asset manager for the project.

Village backstops on portions of the debt could soon be triggered. Reserves kick in first — before the village’s appropriation — on the B bonds, but the village provides some limited support for the A bonds in the form of a $2 million reserve it has pledged to replenish during a ramp-up period. It kicks in before reserves.

Before the July payment, $9.6 million remained in reserves tied to the Series A bonds and $3.2 million on the B bonds. Another $3.7 million was in a hotel and restaurant operating reserve, with $1.25 million available for debt service, but the July payment tapped those funds. Another $1.2 million is in a hotel and restaurant supplemental reserve and $2 million was in the village-funded supplemental ­reserve on the A bonds. The Series C issue is considered an unsecured credit and there are no remaining reserves.

The original bonds financed development and construction of the 500-room Westin Lombard hotel, a conference center, a parking structure, and two full-service restaurants. Lombard created the LPFC to own and finance the project, undertaken to bolster economic development in the village, which is just west of Chicago and O’Hare International ­Airport.

The facilities opened in 2007 but ­struggled to meet original revenue projections. As a result of the project’s troubles, the rated tranches of the bonds have sunk into junk-bond territory and Lombard’s strong credit rating has taken a hit due to its support.

Standard & Poor’s in May raised the issuer ratings on the LPFC bonds to B-minus with a negative outlook from CC. Analysts assigned a rating that anticipates a 30% to 50% recovery for bondholders in the event of a default.

“We still think that the project has limited financial flexibility, but its performance is beginning to improve after reaching a low point in 2010,” analysts wrote. If the project were eventually to declare bankruptcy, the Series A and B holders have a mortgage claim.

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