CHICAGO - The Illinois Metropolitan Pier & Exposition Authority will learn Wednesday the cost of the downgrades it absorbed thanks to the state's budget impasse.
The authority will sell $223 million of securities in a heavily back-loaded issue that provides new money to help finance a new convention center hotel and refunds debt.
The state budget impasse triggered a technical default in the flow of funds toward bond payments, causing Standard & Poor's to strip MetPier's $3 billion of debt of its AAA rating and Fitch Ratings drop its AA-minus rating.
Both dropped the ratings to BBB-plus, one notch below the state's bond rating, because of the appropriation risk. Subsequent state legislation has cured the technical default, but the two agencies plan to continue linking MetPier's rating to the state's.
The downgrades led the authority to revamp its financing plans by pushing up the timing of planned borrowing tied for the new hotel that will serve the authority-owned McCormick Place Convention Center.
Moody's Investors Service, which has long considered the bonds subject to appropriation and already rated them one notch below the state, was not asked to rate the new issue.
In addition to the new bond proceeds, the authority is using a $250 million construction loan from Citibank and $50 million of cash on hand to finance the 1,200 room Marriott Marquis hotel that is expected to be completed in 2017. Officials broke ground on the hotel over the summer.
The under-construction hotel and an adjacent 10,000-seat arena are key pieces of a new entertainment district. The projects along with an existing hotel and massive convention center facilities will "offer an unprecedented collection of meeting spaces under one roof," the authority's chief financial officer Richard Oldshue said in an investor presentation.
The agency had previously planned to sell notes during the construction phase, redeeming them in 2017 with longer-term bonds. It shifted gears and decided to go forward with the current borrowing plan to provide more certainty for the hotel financing by tapping its remaining bonding authority.
The $153 million A series of McCormick Place expansion project bonds includes a $133 million current interest term bond due in 2053 and a $20 million capital appreciation bonds with a final maturity in 2052. The $70 million refunding tranche offers term bonds in 2035, 2040, 2045, and 2052.
Citi and Cabrera Capital Markets LLC are joint-book running senior managers.
Siebert Brandford Shank & Co. LLC is co-senior manager. Public Financial Management Inc. is advising the authority and Katten Muchin Rosenman LLP is bond counsel.
The authority's bonds are backed by taxes on hotel stays, car rentals and other tourist services with statewide sales tax revenues allocated by statute to cover shortfalls between annual tourism tax revenues and debt service.
Because of the budget impasse, tax funds that flow to an authority project fund were available for transfer to the trustee to put toward the December debt service payment but were trapped by the lack of an appropriation.
That prevented the agency from making its July 20 trustee payment, triggering the technical default notice. Gov. Bruce Rauner signed legislation last month permitting the monthly transfers totaling $167 million and the payment of debt service in fiscal 2016 even without a budget in place.
Oldshue stresses in the investor presentation the high coverage provided by state sales taxes and the indenture's strengths - which had once justified their high-grade ratings. The state has the incentive to appropriate the authority's annual payments because the tax funds would otherwise remain trapped in a project fund and cannot be used for other purposes.
In affirming its rating Friday, Fitch now notes that the rating "is sensitive to changes in the rating of the state of Illinois," but also underscores that the credit retains "strong non-impairment language wherein the state pledges that it will not limit or alter the basis on which the sales taxes are collected."
The state-approved 2010 overhaul of the convention authority altered work rules and privatized business operations with the goal of improving the agency's competitive edge. It also tinkered with the authority's borrowing powers allowing it to better "align its debt service schedule with authority taxes," Oldshue said.
The move followed the authority's draw on $57 million in state sales taxes for debt service. The authority has begun paying back that draw, returning $9.7 million to the state. The authority's debt service grows until 2030 when it tops out at about $300 million and then remains steady until 2053.
Investors said the bonds offer an attractive opportunity for yield given the lower ratings that reflect the state's credit. The authority's secondary trading spreads initially jumped by 100 basis points in secondary trading after the technical default.
"While it's not a pure dedicated tax bond structure given the appropriation risk, it warrants a stronger opinion than a typical appropriation bond that lacks a dedicated revenue stream with clear debt service restrictions," said one buyside analyst. "How much stronger than a simple state appropriation pledge is something the potential buyers will have to decide next week.".
Barclays Capital municipal research group said in a report last week that MetPier bonds look attractive.
"The hiatus in monthly debt service deposits was an unfortunate side effect of the state budget impasse and did not signal an unwillingness or inability to pay, in our view," Barclays wrote. "With yields near 18-month highs, we believe that yield differentials between Met Pier long bonds and long Baa and Illinois indices could compress over the medium term, though such differentials are unlikely to return to pre-summer levels."