CHICAGO — The Lombard, Ill., Village Board will vote at a meeting late Tuesday on an appropriation of nearly $1 million to cover a shortfall in the Jan. 1 debt service payment owed on its conference center and hotel debt.
Village officials recomended a “no” vote, which if followed, would result in a draw on reserves.
“This is the first time the village is being asked to cover a shortfall in the bond payments” for the project, which was financed with more than $180 million of revenue bonds issued in 2005 through the Lombard Public Facilities Corp., said village finance director Tim Sexton.
Sexton, along with the village manager, recommended the board vote against the appropriation for the Series A bonds which would come from a village-funded reserve. Debt service reserves would be tapped if the board declines to appropriate the needed funds — currently estimated at $911,000 — to fully make the $3.7 million payment. “There are reserves to cover the shortfall,” he said in explaining his recommendation against the appropriation.
The Series A bonds total $118 million. In addition to project revenues and various reserve accounts, they are payable from a special supplemental reserve of up to $2 million in village funding subject to appropriation. The appropriation backstop kicks in after various operating and supplemental reserves are drained and before the formal debt-service reserve is tapped. The operating and other supplemental reserves were exhausted to cover the July 1 payment.
Lombard’s limited commitment runs from the opening date of the project and expires after three consecutive years during which pledged revenues equal or exceed a coverage ratio of 150% of debt service on outstanding Series A bonds, according to bond documents.
Sexton said the village “is cognizant of the fact that a downgrade is a distinct possibility” for failing to honor the commitment. Financial advisors have told village officials that Standard & Poor’s could lower Lombard’s rating into the single A category. Last December, officials’ support for the struggling project prompted S&P to downgrade the village’s issuer credit rating one notch to AA with a negative outlook.
A shortfall is also expected in the debt service payment owed on $43 million of Series B bonds, although Sexton did not have a total yet. Reserves will automatically cover the amount. The B bonds carry an appropriation pledge from the village that is triggered after the reserves are exhausted. No payment is expected on $23 million of unsecured Series C bonds, which lack reserves or official support.
With the project failing to generate sufficient revenues to repay its debt, officials are exploring options to buy more time for hotel and conference business to pick up following a failed tender offer this past spring. The Lombard PFC invited holders of A and C bonds to tender their bonds at a loss while holders of B bonds were not part of the tender. Too few bondholders agreed to the offering price and the results were rejected by the agency.
Officials believe the project can succeed if they can better match its capital structure with revised revenue estimates based on a recovering economy. Without a restructuring or some other action, prospects remain uncertain.
“Ideally, we would still like to try to restructure the bonds,” although a new plan is not yet on the table, Sexton said.
The project has incurred consecutive years of significant losses and negative cash flows from operations, and was not able to make complete scheduled interest payments during the year ended Dec. 21, 2010, according to the Public Facilities Corp.’s May audit.
“These conditions raise substantial doubt about the company’s ability to continue as a going concern” unless it can reduce expenses and improve cash flows, the audit said.
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. Before the July payment, $9.6 million remained in reserves tied to the Series A bonds and $3.2 million of the B bonds. Another $1.2 million is in a hotel and restaurant supplemental reserve.
The bonds financed 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 just west of Chicago’s O’Hare International Airport.
The facilities opened in 2007 but struggled to meet original revenue projections. As a result, the rated tranches of the debt has sunk into junk-bond territory and Lombard’s strong credit rating has taken a hit.
“We still think that the project has limited financial flexibility, but its performance is beginning to improve after reaching a low point in 2010,” S&P analysts wrote. If the project were eventually to declare bankruptcy, the Series A and B holders have a mortgage claim.