DALLAS - The Denver Convention Center Hotel Authority will issue $349 million of XL Capital Assurance-insured hotel revenue bonds tomorrow to finance a convention center hotel, in the process foregoing the services of a financial adviser.
The deal marks the maiden issuance for the authority, which was created specifically to oversee construction and financing of the 1,100-room hotel. The project was originally placed on the ballot as a mere codicil in a bond referendum requesting $262 million of revenue bonds to finance an expansion of the Colorado Convention Center in downtown Denver.
That ballot item -- which won overwhelming approval from voters -- included the pledge that the city would work to get a hotel built to complement the newly expanded convention center. At the time, the hotel was envisioned as a private-public partnership, and the city teamed up with local developer Bruce Berger to get the project built. However, when the market for private hotel investments dried up following the terrorist attacks of Sept. 11, 2001, Denver opted to follow the lead of such cities as Omaha and Austin and build a city-owned hotel with a Hyatt Corp. flag.
The deal then encountered opposition from three separate unions, including the Hotel Employees and Restaurant Employees International Union and two construction laborers' unions. All three wanted the city to guarantee that unions would have fair access to jobs associated with the management and construction of the new hotel. The city eventually agreed not to block union participation in the project.
U.S. Bancorp Piper Jaffray Inc. is the lead book-running manager for the deal. UBS Financial Services Inc. is the co-senior manager of the transaction, leading an underwriting team that includes A.G. Edwards & Sons Inc., George K. Baum & Co., Harvestons Securities Inc., J.P. Morgan Securities Inc., Kirkpatrick Pettis, RBC Dain Rauscher Inc., and Stifel, Nicolaus & Co.
Kutak Rock and Becker, Stowe & Bieber are co-bond counsel for the sale.
The deal marks a departure for the city, which has traditionally used the services of financial advisers on its bond deals.
"There was no financial adviser on this deal," said Robert Swerdling, a managing director with U.S. Bancorp Piper Jaffray. "With co-senior managers, the city felt they had all the checks and balances they needed."
Swerdling said the deal -- which he calls the strongest credit of any hotel issue he's put together to date -- received two insurance bids.
"The deal will be triple-A rated, but there is no published underlying rating," he said. "However, the insurers require for a transaction of this nature credit qualities indicative of investment grade quality from both Moody's Investors Service and Standard & Poor's."
Swerdling said that convention center hotels are a growing sector in the market and that he is in conversation with no less than 20 municipalities about possible deals.
"People have been relatively slow to recognize the municipal hospitality sector," he said, adding that while voters on the whole are happy to pay for convention centers, they have expected private developers to build the hotels that serve them.
"The costs for hotel development have gotten so out of hand that private development is not working -- the costs have outpaced their ability to finance them," Swerdling said. "However, a governmental entity usually can borrow money at reduced interest rates -- certainly at tax-exempt rates, and the fact is that if the revenue predictions are right, they'll not pay anything into the project."
He said debt service for the Denver project will range from $19 million to $20 million, and the city's commitment to make appropriations to supplement revenues will help to boost coverage ratios for the deal to above 2.75 times. The deal includes serials through 2024 and term bonds in 2023 and 2028.
Denver's general obligation debt is rated in the AA-plus range.
Debt service starts with interest payments for the first two years, amortizing slowly over the next 23 years. The hotel is slated to open in 2006.
"This deal was structured very conservatively, but we expect excess cash flow to be available to retire the bonds in about 20 years," Swerdling said.
The project, originally slated to be a private development costing about $240 million, has risen in cost during the four years of its planning.
"The city initially projected a somewhat smaller budget, but we've put in some extras, such as a rooftop restaurant with the best view of the mountains in town -- things we perhaps could not have done if interest rates hadn't gone down," Swerdling said.
"The hotel is somewhat more expensive than when first proposed as a private project, but the savings we will realize by selling this as a governmentally owned building allows us to provide some extras that we firmly believe will contribute to the success of the project," he said.
The city has been working to inform potential investors about the bond sale, including holding a national sales telephone conference call last Friday.
