Lombard, Ill., and insurer ACA are promoting a proposed restructuring of the village's defaulted hotel and conference debt.

CHICAGO – With a fresh default on debt service looming later this week, a Chicago suburb wants bondholders to buy into a proposed restructuring of its $190 million of hotel/conference center debt.

The village of Lombard since January 2014 has reneged on its pledge to cover revenue shortfalls needed to avoid defaults on a portion of the bonds issued to finance construction of the Westin hotel.

The restructuring proposal, laid out for bondholders in October and disclosed publicly earlier this month, would cancel out $29 million of the debt from the 2005 bond deal's unsecured C series.

Holders of the transaction's $64 million A-1 series, $54 million A-2 series, and $43 million B series, each of which carries different forms of backing, are being asked to exchange their bonds.

The restructuring was struck between various parties led by ACA Financial Guaranty Corp. -- which provides coverage and owns $19 million of the $54 million series -- and Lombard officials.

The aim is to convince bondholders to agree to the new capital structure leading to a possible consensual bankruptcy filing by debt issuer Lombard Public Facilities Corp., according to documents and city officials.

"Discussions are ongoing with all the various parties," said village finance director Tim Sexton. "We are working with all the parties to find the best resolution."

Village officials are promoting the plan as a means to better align hotel revenues with debt repayment while also preserving the hotel's business prospects.

The hotel's capital needs are increasing with little in the pot to cover upgrades because its revenues now go primarily to repay the bonds.

As part of the restructuring, the village would contribute $2.5 million for capital work at the hotel and be freed of further obligations on the debt.

The contribution, not yet presented to or approved by the village board, would ease a burden that has weighed heavily on the otherwise affluent village. Standard & Poor's stripped the village of its investment grade rating in 2014.

Under the restructuring proposal, the Lombard Public Facilities Corp. would retain ownership of the project. Under the current bond indenture, the Series A and B bondholders have a mortgage claim if the project were to declare bankruptcy.

The document does not outline the level of support needed for the plan to be approved and Sexton declined to comment.

The restructuring plan posted on the Municipal Securities Rulemaking Board's EMMA website lays out a warning about the hotel's condition.

"Given market conditions, the hotel's operational and financial performance and its inability to service the existing capital structure, a comprehensive restructuring is needed to preserve asset value and maximize bondholders' return," the plan reads. "If a restructuring plan is not undertaken to solve the default, the asset's value may further deteriorate, including the potential loss of the Westin brand."

The hotel is operated by Westin Hotels & Resorts, part of Starwood Hotels & Resorts.

Bond trustee Amalgamated Bank of Chicago called the October meeting at the request of ACA, a controlling party of the bonds under the indenture when a default has occurred.

The restructuring proposal was laid out by FTI Consulting, Inc., advisor to the trustee.

In disclosing the restructuring terms, a trustee letter makes clear that the "parties have not agreed to the restructuring on any terms including those outlined in the presentation, and each of the parties have expressly reserved any and all rights, remedies or defenses under the bond documents or as otherwise available at law or equity."

Under the proposal, the A-1 bonds would be broken into a "hard" and "subordinate" series with $32.7 million paying an interest rate of 5.25% and carrying a 30-year term and a $32.7 million subordinate series also paying 5.25%, but with a maximum term of 55 years.

The A-2 series would be similarly divided, with $27.3 million paying 5.25% and a 30-year term, and a subordinate $27.4 million piece paying a rate of 5.25% with a maximum term of 55 years.

The B series would be divided into an $18.5 million tax revenue bond series with an interest rate of 3% and a 30-year term and a subordinate $28.1 million series paying 3% with a maximum 55-year term.

The A-1 bonds paid initial yields of between 6% and 7% on term bonds due in 2015 and 2036. The A-2 bonds paid yields between 4.11% and 4.8% with the final maturity in 2036.

The B bonds paid initial yields between 4.125% and 4.59% on the final maturity in 2036.

"The proposed restructuring plan provides a new capital structure with senior and subordinate components designed to capture cash flow from the Hotel and Restaurants for an extended period of time," the plan says.

While the subordinate series poses greater repayment risks, the plan argues that additional benefits of the new structure include the maintenance of bondholder claims and of the bonds' tax-exemption, and the creation of marketable and tradable securities.

It has been previously reported that Nuveen Investments is the majority holder.

The complex has long failed to generate the revenue needed to support its debt. The facility includes a 500-room hotel, two restaurants, 39,000 square feet of meeting and convention space, a 25-meter indoor swimming pool and fitness center, and 675-car, four-story parking deck.

The village board earlier this month declined to cover the upcoming January 2016 shortfall. Sexton said the gap is not yet final.

Lombard's previous refusal to make up shortfalls came ahead of a July debt service payment when it declined to cover a $2.6 million gap. The trustees have long taken the position that the village is not legally obligated to burden its taxpayers.

The Lombard Public Facilities Corp. drained reserves to cover the Jan. 1, 2015 payment on the A series which carries an indirect appropriation pledge.

The July 1 default marked the fourth default on the $43 million B series that carries the village's appropriation pledge.

No payments have been made on $29 million of C series bonds.

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 but they have not done so.

ACA has also instructed the trustee not to take any actions allowed under the indenture as the restructuring plays out.

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 carried a more direct appropriation pledge but reserves were tapped first before the village was asked to cover shortfalls.

Standard & Poor's downgraded Lombard's issuer credit rating six notches to a speculative-grade B from BBB in February 2014. The portion of hotel bonds rated by Standard & Poor's are at the D level.

The village in 2013 withdrew plans for a $10 million new-money issue of certificates when investors took a pass on the non-general obligation debt that would have been secured by any legally available and appropriated funds.

Property tax caps limit the non-home rule village's ability to use the GO pledge. The village opted to invest in municipal bonds to secure a $10 million commercial bank loan as an alternative method of raising funds for infrastructure work. Sexton said Monday the village has no near-term borrowing needs for capital expenses.

The restructuring marks the second attempt by the village to get bondholders to agree to a plan that giving the project more breathing room. A proposed tender of the Series A and C bonds that asked holders to take a loss in 2011 failed due to bondholders' competing interests.

The village of about 43,000 is 20 miles west of Chicago.

In recent trades, the A-1 bonds have changed hands at 30 cents on the dollar while the ACA backed bonds have traded at 80 cents on the dollar, and the B bonds have traded at 29 cents.

One current bondholder, who asked not to be named, remains uncertain of his support for the deal especially given the length of the maturities. He does see a need for the restructuring as the village could eventually face the loss of Westin without capital improvements and revenues could further tank. If the deal goes through, he will be looking closely at trading prices on the restructured paper as he would likely look to shed the bonds. The holder also said he would like to see the village kick in more funding and hopes that S&P doesn't let the village easily win back its investment grade rating. "They are getting off way too easy" for reneging on their appropriation pledge, he said.

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