CHICAGO— Lombard, Ill. lost its investment grade ratings Wednesday for failing to honor its appropriation commitment on bonds for a hotel and conference center that didn't produce enough revenue to repay $190 million in borrowing.
Standard & Poor's downgraded Lombard's issuer credit rating six notches to B from BBB. 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 speculative grade B-minus from BBB-minus, the lowest investment grade level rating.
"The downgrade reflects a recent non-appropriation that triggered a payment default for revenue bonds issued by the Lombard Public Facilities Corp.," Standard & Poor's analyst John Kenward wrote in the review published Wednesday. The outlook is stable on the affluent suburb of 43,000, which once carried a double-A category rating.
Standard & Poor's offered a stinging assessment of Lombard's unwillingness to meet its obligations though its financial management otherwise is considered strong.
"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.
Lombard's finance director, Tim Sexton, said Wednesday village trustees have "made the decision that taxpayers shouldn't have to shoulder the burden of subsidizing hotel revenues over the long term."
The public facilities corporation issued $190 million of bonds in 2005 to finance a 500-room hotel and convention center. The city backed the $43 million Series B with its appropriation pledge.
A proposed tender of the Series A and C bonds at a loss failed in 2011. Nuveen Investments is the majority holder.
"The village continues to work with the bond insurer and other parties to try to reach a long-term solution," Sexton said.
The village 20 miles west of Chicago refused to cover a Jan. 1 shortfall, resulting in a payment default on a village-supported piece of the bonds issued by the facilities corporation.
Lombard's elected board voted against appropriating funds in December. The board's decision resulted in the first payment default on the B bonds.
Reserves were drained but still fell short. Sufficient reserves allowed for the full payment to be made on $118 million of Series A bonds which have limited village support under a tax abatement agreement, according to a notice of default published by bond trustee Amalgamated Bank of Chicago. No payment was made on $29 million of subordinated Series C bonds which don't carry any village support.
No rating change is expected in the next two years unless the village adopts debt policies aimed at resolving its current situation on the hotel bonds or that "clearly demonstrate this would not happen again," Kenward said.
A few other Midwestern cities lost investment grade ratings over refusing to make good on appropriation, moral obligation, or lease supported pledges that helped sell investors on the debt, but such defaults remain rare, Kenward said.
"It is rare in the Midwest and rare nationally especially when an essential government purpose project is involved. Recent cases have involved economic development projects," Kenward said.
Moody's Investors Service and Standard & Poor's punished Vadnais Heights, Minn. in 2012 by dropping its once solid double-A ratings to junk after it decided to cancel its lease and halt financial support for a sports complex. Moberly, Mo. lost its single-A-level investment-grade rating after it declined to make good on its appropriation pledge supporting $39 million of revenue bonds issued for an artificial plant.
Lombard's decision is all the more striking to market participants because of its sound fiscal position and reserves and further fuels concerns over pledges less secured than a GO promise, market participants said.
The village's decisions have already taken a toll on its market access. Officials last year 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. Proceeds are expected to cover the village's infrastructure needs through 2015 so near-term market access is not needed, Sexton said.
The Series A bonds last year were trading at 67 cents on the dollar while the Series B bonds traded last month at 34 cents on the dollar. About $2.9 million remains in reserves on the A bonds, a portion of which carry insurance from ACA Financial Guaranty Corp.
Standard & Poor's Wednesday affirmed its D rating on the portion of the B Series bonds it rates.