Chicago-based convention center issuer brings junk rating to market

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CHICAGO – With one speculative-grade rating, the Illinois Metropolitan Pier and Exposition Authority heads into the market next week with a $475 million deal to take out its short-term hotel financing and refund debt in an effort to ease the need for future state tax draws.

The issue is the MPEA’s first public offering since one of its ratings sank to junk due to the state’s general obligation credit deterioration.

S&P Global Ratings affirmed its BB-plus rating and stable outlook ahead of the sale slated for Nov. 14.

S&P had stripped the authority of its AAA rating and Fitch Ratings of its AA-minus rating in 2015, and MPEA saw its spreads widen by about 50 basis points on a 2015 sale because of the downgrades. Fitch affirmed its BBB-minus rating and negative outlook ahead of the deal.

Under the authority’s complex flow of tax revenues, pledged tax funds are set aside but a budget appropriation is required to free up those funds to be sent to the trustee. The state budget impasse highlighted the appropriation risks and in 2015 both agencies began notching the rating off the state’s GOs.

"The rating reflects our view of annual appropriation risk, which was illustrated in early fiscal 2016 when the absence of an adopted state budget or a timely separate extraordinary appropriation led to a temporary technical default; Illinois' general creditworthiness; and bond provisions…that allow for the availability of authority and state sales tax revenues, which, once appropriated, provide strong debt service coverage,” wrote S&P analyst Gabriel Petek.

While MPEA must rely on the state for an appropriation to make the transfers, it highlights in an investor presentation the healthy coverage ratios and the inability to use tax revenues that automatically go into a project fund for any other purpose besides debt service.

The authority is issuing the bonds “to finalize its permanent financing for construction of the Marriott Marquis Chicago and to refund a portion of outstanding expansion project bonds,” MPEA executive director Lori Healey said in the recorded presentation.

The authority owns and manages McCormick Place Convention Center, two hotels, the Wintrust Arena which opened last month, and Navy Pier, although the latter is privately operated. The new arena is home to DePaul University’s basketball teams.

The deal taps nearly $300 million in additional bonding authority approved in the state’s fiscal 2018 budget package. The authority has $2.6 billion of outstanding convention center expansion bonds.

The heavily back-loaded structure that mostly repaid in the final five years includes a combination of current interest, deferred interest, and capital appreciation bonds with a final maturity of 2057 on the 2017 bonds and 2058 on a small portion being forward delivered in 2018.

Citi and Morgan Stanley are joint book-runners. PFM Financial Advisors LLC is advising the authority. The bonds are secured by authority’s tourism related taxes and backed up by pledged state sales tax with the latter providing healthy debt service coverage levels of more than 20 times.

Proceeds will repay a $250 million construction loan that helped finance the authority’s second hotel, the 1,205-room Marriott with 90,000 of meeting space. It will also refund outstanding debt under the authority’s debt restructuring plan launched in 2010 to better align rapidly growing debt service from it past new money issues with its own tax revenues.

The restructuring is designed “to reduce the likelihood of future draws on state sales tax deposits,” William Daley, Morgan Stanley’s lead banker on the deal, said in the presentation.

With the refunding, MPEA expects to repay all remaining outstanding state tax draws which totaled $57 million and were taken when its own revenues fell short during the Great Recession. The MPEA collects taxes on hotels, downtown restaurants, auto rentals, and airport taxi rides. Since fiscal 2010, authority taxes have rebounded from a low of $98 million to $150 million in fiscal 2017.

The MPEA has long plotted the permanent financing for the new hotel. It previously sought new borrowing capacity in a proposed $1.2 borrowing plan floated to demolish one existing exhibit hall to make room for Star Wars creator George Lucas’ planned museum. The proposed site on the lakefront was met with legal challenges and Lucas instead opted for a Los Angeles site.

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Primary bond market Speculative grade bonds Metropolitan Pier & Exposition Authority Illinois