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.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.