The under-construction, bond-financed Marriott Marquis Chicago hotel is part of the Illinois Metropolitan Pier and Exposition Authority's new entertainment district.

CHICAGO — Illinois Metropolitan Pier & Exposition Authority officials said they are pleased with the results of its Wednesday pricing of bonds that lock up financing for its new hotel, even though it paid a penalty for the recent loss of its high-grade ratings.

The authority sold $223 million in a heavily back-loaded issue, its first borrowing since the state’s budget impasse cost it its AAA Standard & Poor’s rating and its AA-minus score from Fitch Ratings.

Both rating agencies dropped their ratings to BBB-plus, one notch below the state’s general obligation rating, after they deemed it subject to appropriation risk.

The spread on the deal’s 30-year current interest bond jumped by 43 basis points over what the authority paid on a similar CIB maturity in its 2012 sale. Investors said the bonds offered an attractive opportunity for yield, roughly about 50 basis points more than what the authority could have expected before the downgrades, given the lower ratings that reflect the state's credit but considering its still-sound coverage ratios.

Moody’s Investors Service, which had already classified the credit as subject to appropriation risk and notched its rating below the state’s, was not asked to rate the new deal.

“The deal was two times oversubscribed, allowing the authority to improve pricing for most maturities from 1 to 10 basis points,” authority chief financial officer Richard Oldshue said in a statement. “The $153 million raised in the transaction completes the funding for our hotel project, allowing MPEA to go forward with two projects important to MPEA, to the city and to the state.”

Citi and Cabrera Capital Markets LLC were joint-book running senior managers.

The authority’s 30-year current interest bond paid a yield of 4.87 %, 162 basis points over the Municipal Market Data’s top-rated 30-year maturity of 3.25%. A triple-B, 30-year bond pays an average yield of 4.25%.

In the authority’s 2012 deal, its 30-year current interest bond paid a 4.15% yield, 119 basis points over the MMD’s top-rated 30 year bond average of 2.96%. A triple-B credit paid a yield of 4.63% during that period.

Credit spreads are now narrower than they were in 2012 when a AAA paid 2.96% and a BBB rated 30 year paid 4.63%. The rates Wednesday were 3.25% on a AAA and 4.25% on a BBB.

The downgrades led the authority to revamp the hotel financing plan by pushing up the timing of planned borrowing. 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 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.

The lack of an appropriation without a state budget in place left the authority unable to make its July payment to the trustee to put toward a December debt service payment, creating a technical default.

Legislation has since been signed by Gov. Bruce Rauner to alleviate that problem and allow for all payments to be made in fiscal 2016.

The agency is also working on construction of a new arena that along with the hotel and other projects will make up an entertainment district adjacent to the authority-owned McCormick Place Convention Center and an existing hotel.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.