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Lombard Draws on Reserves

CHICAGO — The Lombard Public Facilities Corp. in Illinois drew $1.5 million from reserves to cover debt-service payments owed this month on nearly $190 million of revenue bonds issued in 2005 to finance construction of a hotel and conference center in the village.

The corporation, which owns the struggling hotel complex about 20 miles west of downtown Chicago, used $911,000 in reserves to cover a shortfall in project revenues needed to fully make a $3.7 million payment owed on $118 million of Series A bonds. That came after the Lombard village board last week refused to approve an appropriation to cover the shortfall.

Standard & Poor’s on Thursday knocked Lombard’s issuer credit rating down to BBB from AA because of the village’s failure to honor the pledge. The rating agency lowered the rating on the portion of A bonds it rates to CCC from B-minus.
In addition to project revenues and various reserve accounts, the Series A bonds 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.

Last month, Standard & Poor’s affirmed the B-minus and negative outlook assigned to a portion of the Series A bonds. The project includes an 18-story, 500-room hotel, a 55,500-square-foot convention center and two restaurants. It has struggled to meet initial revenue projections.

“The rating reflects our view of such factors as significant underperformance by the hotel and restaurant during the recession, the project’s event risk and related potential for a future debt restructuring, and a potential increase in debt service payments of about 20% in 2012 as principal repayment begins,” said analyst Ben Macdonald.

Lombard’s limited commitment on the Series A bonds 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 the bonds.

The corporation used $636,000 from reserves to cover the payment owed on $43 million of Series B bonds. Under the indenture, the corporation can turn first to reserves to cover any shortfall.

The Series B bonds carry an appropriation pledge from the village that is triggered after the reserves are exhausted. No part of the $2 million payment owed on $29 million of Series C bonds, which lack reserves or village support, was made.

Though the project has struggled, the Jan. 1 payment marked the first time the corporation needed to ask the village to step up and cover a shortfall. Lombard finance director Tim Sexton said last month he and the village manager recommended the board vote against covering the payment because reserves were available.

Sexton said the village was “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 from AA. S&P in late 2010 downgraded the Lombard’s issuer credit rating and assigned a negative outlook due to risks associated with its support for the project’s bonds.

Village officials still hope to restructure the debt to buy time for business to pick up following a failed tender offer last spring. The Lombard PFC invited holders of Series A and C bonds to tender their bonds at a loss. Too few bondholders agreed to the offering price and the results were rejected by the agency. Without a restructuring or some other action, prospects remain uncertain.

More than $10 million in reserves remain. Portions of the Series A bonds traded at 57 cents on the dollar last year while Series B bonds traded at 67 cents on the dollar. If the project were eventually to declare bankruptcy, the Series A and B holders have a mortgage claim.

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