The Denver Convention Center Hotel opened in 2005 adjacent to the Colorado Convention Center.

DALLAS – The Denver Convention Center Hotel Authority will offer investors $274 million of revenue bonds to refund all its previous debt and free up money for improvements.

The bonds, recently upgraded by Moody's Investors Service to Baa2 from Baa3, are scheduled to price Wednesday through negotiation with book runner Piper Jaffray and Co.

Bill Mosher, chief executive of the authority, said the low-interest rate environment presents an opportunity to capture about $29 million of present value savings and free up capital reserves.

"Refinancing also creates additional opportunities to simplify our indenture, renegotiate the hotel operating agreement for additional savings, and match the final maturity of the bonds with the final maturity of the economic development agreement we have with the city of Denver," Mosher said in an online "roadshow" presentation to investors.

"Over the next seven years, we anticipate about $71 million of capital improvements for the hotel that will be financed through the increase in capital reserves," he said.

Closing is expected Nov. 8, but pending approvals led S&P Global Ratings to issue only a preliminary rating of BBB-minus.

"The final rating will follow our review of final execution documents for the transaction and the final pricing of the series 2016 bonds," S&P analyst David Lum wrote.

The financing plan, as described by S&P, would apply current debt service reserve funds of $48.65 million toward refunding the $331.19 million outstanding on series 2006 bonds. That would leave a new debt service reserve account of $21.98 million.

Brad Langner, managing director for Piper Jaffray, said the true interest cost on the new debt is expected to come in just below 4%.

"Based on current market conditions we estimate that would generate about $33.7 million of premium proceeds," Langner said.

With final maturity in 2040 – five years beyond that of the 2006 issue -- the bonds will have average maturities of 16.3 years, well short of the expected life of the hotel.

Debt service for the first three years will pay interest only, followed by three years of some principal payments.

"From 2022 to 2040 we will have level debt service and there may be term bonds proposed in 2035 and 2040," Langner said.

The hotel authority was created by the city and county of Denver in March 2003 as a nonprofit corporation with a seven-member board. After contracting with the Hyatt Corp. to manage the hotel, construction started in 2003.

Completed in 2005 at a cost of $354 million, the 1,100-room hotel's two towers of 37 and 26 stories are adjacent to the Colorado Convention Center.

The original 2003 revenue bonds were refunded with the $356.2 million 2006 issue. The bonds are backed by net hotel revenue, a mortgage on the property, and a city subsidy.

"The city's contribution averages 56% of annual debt service through the debt term and, we believe, provides a predictable nonproject revenue source," Lum wrote. "This compares favorably to other hotel assets within the U.S., as the payments are fixed appropriations of the city as opposed to being based on a tax increment financing or other tax receipts."

The hotel's December 2005 opening strengthened Denver's profile as a convention city, and was credited by boosters with helping land the Democratic National Convention that nominated President Barack Obama in 2008.

In addition to its downtown competition, the hotel will compete with a Gaylord Resort in suburban Aurora beginning in 2018.

The Gaylord's size and proximity to Denver International Airport will be a strong selling point. However, downtown Denver is now served by a Regional Transportation District rail line from the airport.

"Competition from regional and national convention destinations may pressure the ability to consistently generate substantial group business, potentially impacting cash flow predictability," Moody's analyst Moses Kopmar wrote.

The hotel achieved strong financial performance in fiscal year 2015, with net operating revenues rising 4.9% to $29.8 million, according to Moody's.

"Another strong year of convention business and a record-breaking year for visitors in Denver benefitted the hotel, with utilization and pricing metrics both increasing over 2014 levels," Kopmar wrote.

Occupancy rates increased slightly to 75.2%, and average daily rates rose to $187 from $183. That lifted revenue per available room to $141 from $137.

The hotel bond issue comes nearly a year after Denver voters approved the extension of a 1.75% hotel and car rental tax in a measure that will raise up to $778 million to expand the downtown convention center and upgrade the National Western Stock Show complex to the north.

"Stronger market demand is expected once the convention center expansion is completed," Lum said. "The hotel has maintained a premier position in Denver hotels, as evidenced by its ability to charge premium pricing and withstand hotel additions."

Although the convention center and the National Western complex are miles apart, the two venues are major attractions for hotel stays in the city.

Denver battled Aurora to keep the National Western at its original home in a mixed industrial and residential section of the city bisected by the Interstate 70 viaduct. Improvements to the stock show grounds coincide with plans to redevelop I-70 as a below-grade freeway with tolled lanes. That would allow for development of a park above the interstate that could bridge the gap between stock show pavilions.

Had Denver not contested the move, the National Western was planning to relocate to a site near the new Gaylord Resort and the airport.

Denver's convention and visitors bureau, known as Visit Denver, teams up with convention center hotel management to lure business. Groups account for more than 60% of business for the hotel.

Under the Economic Development Agreement between the city and the hotel, Denver is prohibited from designating any other convention center headquarters hotel or from diverting convention business from the hotel.

"The presence of such an agreement is uncommon among Moody's rated hotels and provides the hotel with a competitive advantage in the Denver market," Kopmar said.

According to the business technology firm Cvent, Denver ranks 12th nationally in bookings of conventions and meetings, just ahead of regional rivals Phoenix and San Antonio but well behind third-ranked Las Vegas.

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