CHICAGO – With its credit damaged over the struggles of its hotel and conference center, Lombard, Ill. plans to shift gears and buy municipal securities to help finance capital projects.
The village intends to invest in municipal bonds rated A or better to secure a $10 million commercial bank loan.
The affluent suburb west of Chicago saw its general obligation rating slide to BBB from AA for failing to honor a financial commitment tied to $190 million of debt issued for the struggling hotel complex that has tapped reserves to cover recent debt payments.
The village pulled $10 million of new-money certificates from the market last June. The certificates were to have been secured by any legally available and appropriated funds, but lacked a firmer full faith and credit pledge.
Investors took a pass on the deal being underwritten by Robert W. Baird & Co. over concerns tied to the village’s actions on the hotel bonds, city finance director Tim Sexton said at the time. Use of its full faith and credit pledge is limited due to property tax caps as a non-home rule community.
The village began working with local banks to explore its options for raising funds for capital projects in order to leave healthy general fund balance intact, Sexton said. Officials considered an alternate revenue bond structure commonly used by non-home rule towns in Illinois, but remained concerned over whether investors would again shun the sale or demand too steep an interest rate penalty.
The city settled on a seven-year bank loan from Wheaton Bank, a subsidiary of Wintrust Financial Corp. The city will secure the loan with municipal securities that it intends to buy with reserves. Payments received from the bond investment will repay the loan. The spread between the loan and the interest rate on the purchased bonds is expected to be 1%. “We think this is our best option at this time,” Sexton said.
The village council approved the transaction last month and Sexton said it should close later this month. Proceeds will finance stormwater, transportation, and other projects and should cover the city’s capital needs for three years.
The Lombard Public Facilities Corp. issued the hotel and conference debt in three series in 2005. Under terms of a tax rebate agreement, the village pledged -- subject to appropriation -- to cover a debt-service shortfall on $118 million of series A bonds before a formal reserve is tapped. The backstop was triggered with the January 2012 payment.
The village’s decision not to honor the pledge prompted Standard & Poor’s to lower the village’s GO rating six notches to BBB. LPFC bonds rated by the agency are below investment grade.
The village’s decision not to honor the appropriation pledge was tied to the availability of reserves. The city has set up a special ad-hoc committee to come up with a long-term plan to buy the project time to improve operations and generate revenues needed to cover the debt. A proposed tender of the A and C bonds at a loss failed in 2011. Nuveen Investments is the majority holder. “We are still meeting and discussing options,” Sexton said.
About $2 million in reserves were tapped to fully cover a Jan. 1 payment this year on the A bonds and $845,000 was drawn for the payment on $43 million of B bonds. The B bonds carry an appropriation pledge but reserves are tapped first. No payment was made on $29 million of unsecured Series C bonds.
Reserves and project revenues should cover the July 1 payment, but they may fall short in 2014. Bonds have recently traded in the 50 cents on the dollar range.
The project includes an 18-story, 500-room hotel operated by Westin Hotels & Resorts, a 55,500-square-foot convention center and two restaurants.
If the project were to declare bankruptcy, the A and B bondholders have a mortgage claim.
