CHICAGO—Negotiations continue on a proposed restructuring of $190 million of debt Lombard, Illinois issued for a hotel and conference center, amid a fresh default this month and the insurer's decision to accelerate debt repayment.
"Negotiations with the various parties continue and we hope to have an agreement in the not too distant future," said Tim Sexton, finance director for the village of Lombard. The actions don't "have a practical effect on the operations of the hotel."
The Chicago suburb since January 2014 has reneged on its pledge to cover revenue shortfalls needed to avoid defaults on a portion of the bonds issued by the Lombard Public Facilities Corp. to finance construction of the Westin Hotel. The village board again refused at a June meeting to cover a shortfall on July 1 payments.
The amount owed on the latest payment, however, took a big leap as insurer ACA Financial Guaranty Corp. acted on its post-default rights as the controlling party and directed the trustee Amalgamated Bank of Chicago to accelerate bond repayment, according to notices filed by the Lombard Public Facilities Corp.
"The trustee is to take no other remedial action at this time," an ACA letter says.
That means the LPFC now owes the full $66.5 million of outstanding principal and interest on the uninsured A-1 series. A $546,261 July 1 payment was made from project debt service funds.
Another $55.2 million of accelerated principal and interest is owed an A-2 insured series. ACA contributed $957,534 to cover the July payment to fully meet an interest payment of $1.4 million with the remainder coming from project debt service funds.
S&P Global Ratings said the payment would be ACA's last.
"Per the notice, ACA Financial Guaranty Corp. will make the July 1, 2016 interest payment on the 2005A-2 bonds, marking its last payment," analysts wrote in a report downgrading the "issue-level" rating on the A-2 bonds to D from CC.
Other project bonds rated by the agency have previously been lowered to D. The rating agency's recovery rating of '4' remains unchanged with an estimate of roughly 35%.
"We view the most likely scenario to be a restructuring that provides debtholders a recovery equivalent to the present value of expected future cash flows from the hotel operations. However, we note there is some uncertainty about the bankruptcy chapter under which the project would file if insolvent," the report said.
Sexton said he believed that bondholder payments would continue from project revenues but ACA will have control over distributions.
Nearly $47 million of uninsured B series principal and interest also remains now due after $544,716 was paid on the B series bonds July 1. No payments were made on the deal's remaining $29 million of debt in a C series. Holders who did not benefit from any village related pledges were owed $1.9 million July 1.
A restructuring proposal was laid out for bondholders in October that would cancel out $29 million of the debt from the 2005 bond deal's unsecured C series. One holder said negotiations have moved at a snail's pace and one market participant suggested the acceleration might elevate the pressure on reluctant parties.
Holders of the transaction's A-1 series, A-2 series and B series, each of which carries different forms of backing, were asked to exchange their bonds.
The restructuring was struck between various parties led by ACA -- which in addition to providing coverage on the A-2 series owns $19 million -- and Lombard officials.
The aim is to convince bondholders to agree to the new capital structure leading to a possible consensual bankruptcy filing by the LPFC, according to documents and city officials.
Under the proposal, the LPFC 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.
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 restructuring would ease a burden that has weighed heavily on the otherwise affluent village of 43,000, 20 miles west of Chicago.
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 a 675-car, four-story parking deck.
The trustees have long taken the position that the village is not legally obligated to burden its taxpayers. The A series carries an indirect appropriation pledge on a rebate agreement and the B series carries the village's appropriation pledge. Standard & Poor's downgraded Lombard's issuer credit rating six notches to a speculative-grade B from BBB in February 2014.
In recent trades, the A-1 bonds have changed hands at 26 cents on the dollar while the ACA backed bonds have traded recently at near full value, and the B bonds traded last month at 26 cent. It has been previously reported that Nuveen Investments is the majority holder.