CHICAGO — Lombard, Ill.'s refusal to cover a debt service shortfall on $190 million of bonds issued for a struggling hotel and conference center has triggered a new payment default.
The new default on the bonds' A series follows the village's default early last year on the $43 million Series B, which carry the village's appropriation pledge. Standard & Poor's responded last year by stripping the otherwise fiscally healthy Chicago suburb of its investment grade ratings.
The issuer - the Lombard Public Facilities Corp. - drew the remaining $507,000 in Series A reserves to help cover the Jan. 1 payment owed on $118 million of A bonds which are broken into two tranches, according to a bondholder notice posted by the facilities corporation.
The funds fell $1 million short of fully covering principal and $320,000 short of interest due on the A-1 series for $64 million. Those amounts were not paid, prompting bond trustee Amalgamated Bank of Chicago to post a notice of default.
ACA Financial Guaranty Corp. provides coverage on the A-2 series for $54 million and made up the $835,000 needed to fully cover principal and $208,000 needed to cover interest on the A-2 bonds, according to the notices.
A total of $360,000 of principal and $646,000 of interest was not paid on the B bonds, the third default on those securities. No payment was made on $2.3 million owed Jan. 1 on $29 million of C series bonds.
The village's board of trustees has long declined to cover any gaps in hotel revenues, believing the village is not legally obligated to burden its taxpayers. A proposed tender of the Series A and C bonds at a loss failed in 2011. Nuveen Investments is the majority holder.
A special committee has been assigned to come up with a long-term plan.
"We are continuing discussions with ACA and some of the other major parties and I think we are making progress," said village finance director Tim Sexton.
Under terms of a tax rebate agreement, the village pledged — subject to appropriation — to cover debt-service shortfalls on the Series A bonds before reserves are tapped. The backstop was first triggered in 2012. The B series carry a more direct appropriation pledge but reserves were tapped first before the village was asked to cover shortfalls. The $29 million C series does not carry any village support.
Standard & Poor's downgraded Lombard's issuer credit rating six notches to a speculative-grade B from BBB in February 2014. It also dropped the village's debt certificates — which are payable from any legally available revenues and are notched one level below the issuer credit rating — to B-minus from BBB-minus, the lowest investment grade level rating. The portion of hotel bonds rated by Standard & Poor's are at the D level.
"We are likely to continue to assess the city's overall management as very weak until, in our opinion, the city no longer exhibits an unwillingness to support appropriation debt in a full and timely manner," it wrote. The outlook is stable on the affluent suburb of 43,000, which once carried a double-A category rating.
The public facilities corporation issued $190 million of bonds in 2005 to finance the project, which 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 Series A and B bondholders have a mortgage claim.
The village of about 43,000 is 20 miles west of Chicago. The January 2014 default marked the first actual payment default and it gave bondholders of the A and B bonds the right to accelerate repayment. Holders have not yet acted on that right, Sexton said.
The village's decisions have already taken a toll on its market access. Officials in 2013 pulled a $10 million new-money issue of certificates when investors took a pass on the debt. The village opted to invest in municipal bonds to secure a $10 million bank loan as an alternative.
The Series A bonds have most recently traded at 66 cents on the dollar and the B bonds at 30 cents on the dollar.
Market participants last year said Lombard's position on the bonds is striking because of its sound fiscal position. The village maintains a 25% general fund balance and market participants believe it has the means to make good on its pledge.