Regional News

Deadline Looms for Hotel Tender

CHICAGO — A Chicago suburb that gambled on a hotel and conference center is now asking some bondholders to take a haircut under a restructuring plan that also raises its own financial risk in the struggling project.

Holders of $144 million of the Lombard Public Facilities Corp.’s $187 million of debt issued for the village’s hotel and conference center face a Thursday deadline on the agency’s invitation to tender A and C series bonds under a proposed  restructuring plan.

“By purchasing and then cancelling the bonds, the LPFC hopes to reduce its annual debt-service payments on its debt,” the tender invitation reads. The issuer will accept or reject the tender results on April 4.

Piper Jaffray & Co. is serving as the dealer agent and Bondholder Communications Corp. is the tender agent.

Lombard will fund the tender primarily through the sale of ­refunding bonds and hopes to enhance their marketability by attaching an appropriation pledge, which garnered the bonds a AA-minus rating from Standard & Poor’s.

The tender offers holders $670 per $1,000 principal, plus accrued interest, for the $63.9 million 2005A-1 series and the $54 million 2005A-2 series. It offers $200 per $1,000 principal, and no accrued interest, for the $6 million 2005C-1 series, $9.7 million 2005C-3 series, $5 million 2006 C-3 series, and $1.8 million 2006C-3 series.

The LPFC also sold a $43 million 2005 B series; those bonds carry an appropriation pledge from the village and are not included in the tender invitation.

A successful tender based on the village’s restructuring plan requires 75% participation of the A holders and 100% participation of the C holders. The refunding deal includes a Series A for $63.5 million of conference center and hotel first-tier refunding revenue bonds and a C series of thirdtier refunding revenue bonds for $6.9 million.

Under a tax rebate agreement, Lombard pledges to make up a shortfall in project revenues to cover debt service in the event that reserves are exhausted. Piper Jaffray is the underwriter and Shanahan & Shanahan LLP is bond counsel. Speer Financial Inc. is serving as financial consultant. A tentative settlement date is set for late next month.

Without a restructuring, village officials warn that substantial debt-service shortfalls loom and the failure to finance management and capital expenses could hurt the project’s viability, resulting in further shortfalls.

The original bonds financed development and construction of the 500-room Westin Lombard hotel, which includes a 55,500-square-foot 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 located just west of Chicago and O’Hare International Airport in DuPage County.

The facilities opened in 2007 but have struggled to meet original revenue projections, forcing officials to dip into reserves to fully cover recent debt-service payments.

Village officials put much of the blame for the hotel’s struggles on the 2008 financial crisis and recession. 

“The Westin Lombard was particularly hit hard as the brunt of the economic downturn occurred in only the second year of its operations, before the project had reached a stabilized level of operations,” according to the tender documents.

Occupancy isn’t expected to exceed 68% over the long term and the restaurant — which faces tough competition in the area — has fallen short of original projections that it would contribute 20% of the project’s net income.

The trustee drew about $1 million from operating reserves to fully cover the January debt-service payments owed on the Series A and B bonds. None of the debt payments owed on the 2005 and 2006 C bonds were made.

The trustee holds $10.8 million in reserves to cover future payments on the A bonds, but there are no remaining reserves on any of the C bonds.

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 the strain of supporting the project.

With the village on the hook for a portion of debt service payments, officials commissioned a new marketing study and assembled a restructuring plan that revises the capital structure and gives the hotel more time to achieve balanced operations that can support debt service.

At the time of their issuance, the Series A-1 bonds were unrated and the A-2 bonds were rated A based on insurance coverage from ACA Financial Guaranty Corp.

Standard & Poor’s downgraded ACA to CCC in 2008 and by year’s end withdrew the rating at the company’s request. If the tender is successful, ACA will rebate a portion of its insurance premium to help fund the tender payment. The C bonds also were not rated.

The A bonds carry some limited support from Lombard in the form of a $2 million reserve it has pledged to replenish during a ramp-up period but the C bonds carry no support.

After announcement of the tender earlier this month, Standard & Poor’s lowered its issuer ratings on the LPFC bonds to CC from B-minus and assigned a negative outlook.

“At the same time, we assigned a recovery rating of 4, indicating an average 30% to 50% recovery of principal if a payment default occurs,” the rating report reads.

The rating agency notes that operating revenue may fall short of debt service needs but there is sufficient liquidity from reserves to cover two years of debt service on the A and B bonds.

About $9.6 million remains in reserves tied to the A bonds and $3.2 million on the B bonds. Another $3.7 million is in a hotel and restaurant operating reserve, but $1.25 million is available for debt service.

Another $1.2 million is in a hotel and restaurant supplemental reserve and $2 million remains in the village-funded supplemental reserve on the A bonds that remains in place until project revenues provide 1.5 times debt service coverage for three consecutive years

The B bonds, which carry village support in the form of an appropriation pledge, were downgraded to B-minus with a negative outlook from AA last August by Standard & Poor’s. In December, they were placed on positive credit watch.

The downgrade was triggered over concerns that principal repayment could be accelerated if the A bonds fell into default due to their relationship in the bond indenture.

Under the restructuring plan, if the tender and refunding bond issue are successful a new indenture will be established that would limit the events of default on the B bonds.

“This situation should remind investors that off-balance commitments can provide serious risk to investors,” said Richard Ciccarone, chief research officer at McDonnell Investment Management.

The village’s support for the struggling project prompted Standard & Poor’s to downgrade Lombard’s issuer credit rating one notch to AA with a negative outlook in December. The agency assigns a AA-minus to the proposed restructuring bonds that carry an appropriation pledge from the village.

Though the restructuring buys the project some time and the village more breathing room on its commitment, it also significantly boosts the project’s potential burden as Lombard will be on the hook to repay the $70 million of restructuring bonds in addition to the $43 million 2005 B series.

“If the restructuring is successful, the village will be in a better position, but they still will face stress if projected revenues fall short,” said Standard & Poor’s analyst John Kenward, who described the high level of public support provided for the Westin project as rare.

The village also has limited financial flexibility to raise additional tax revenue because of property tax caps based on its non-home rule status in Illinois.

Tender documents and project information is available at www.bondcom.com/lombard.

The 2036 maturity in the A-1 series, which paid a 7.125% interest rate, most recently traded in December at 82 cents on the dollar. An A-2 2036 maturity which paid 5.5% most recently traded at 60 cents on the dollar in January.



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