Illinois MPEA readies refunding to ease debt service pressure
The public agency that owns and operates Chicago’s convention center returns to the market next week with a $923 million refunding, its first deal since S&P Global Ratings restored its investment grade status.
The Metropolitan Pier and Exposition Authority, or MPEA, will forward refund 2010 debt. In tandem with the sale, the agency will privately place $56 million of taxable bonds to refund existing debt.
The agency must act quickly to place the $56 million piece because of a Dec. 15 deadline to certify its debt service requirements with the state. That piece will be rolled into the larger $923 million sale of refunding expansion project bonds being sold on a forward basis.
The refinancing will achieve between $120 million and $150 million of savings over the life of the bonds with the final maturity remaining in 2050. The savings are taken throughout the life of the schedule, but at least $20 million is being taken upfront.
The authority's bonds are backed by taxes on Chicago-area hotel stays, car rentals and other tourist services, with statewide sales tax revenues allocated by statute to cover shortfalls between those annual tourism tax revenues and debt service.
“This refunding will allow the authority the opportunity to replenish its $30 million authority tax reserve fund by $20 million,” Chief Financial Officer Larita Clark said in an interview. The special account serves as a “buffer” if the authority’s tax revenues fall short of its escalating debt service schedule, allowing the agency to avoid drawing on the backup pledge of state sales taxes.
MPEA, owner and operator of the 2.6-million-square-foot McCormick Place, which is the largest convention center in North America, drew $8.6 million from the reserve in fiscal 2019 and anticipates a possible draw of $12 million in fiscal 2020 based on projected tax collections.
The savings in all maturity years will ease the pressures associated with the agency’s escalating debt service and the refinancing is also structured to ease debt service repayment in 2021 and 2023 when a deficit is projected. Using refundings to address the escalating, back-loaded debt service schedule is part of the agency’s long-term plan to avoid state tax draws.
Tax revenue growth remains solid at 4.5% for fiscal 2019 and at 3% so far for the current fiscal year, but the original debt service schedule featured a steep and back-loaded ramp in order to avoid tourism tax hikes.
The bonds mature from 2037 to 2050. Goldman Sachs and Morgan Stanley are joint book-running senior managers. PFM Financial Advisors LLC is advising the authority and Katten Muchin Rosenman LLP is bond counsel. The pricing is expected Tuesday or Wednesday. Goldman is holding the $56 million private placement.
The authority also owns two hotels, the Wintrust Arena and Navy Pier, which are privately operated. The arena is home to DePaul University’s basketball teams and a WNBA professional women's basketball team.
The authority once enjoyed a AAA rating from S&P Global Ratings and an AA-minus from Fitch Ratings. Both cut the ratings to reflect state appropriation risk after a technical default occurred in 2016 during the state’s two-year budget impasse that ended in mid-2017.
The state backup provides strong coverage ratios. But a state appropriation is needed to free up the authority’s tax revenues for monthly transfers to the trustee so that debt service can be paid. The lack of a state appropriation freezes all the funds as they cannot be used for state operations either. The impasse that saw Illinois go two years without an enacted state budget exposed weak links in the backup chain.
As the state’s rating fell, so did MPEA’s ratings. Moody’s Investors Service had already linked the rating to the state of Illinois, which it rates at the lowest investment grade rating of Baa3, and therefore rates MPEA at the junk level of Ba1.
S&P cut the rating to the junk level of BB-plus, one notch lower than the state, in 2017, but in 2018 lifted it to the investment grade rating of BBB, with a stable outlook, after the rating agency revised its priority-lien tax revenue backed debt criteria.
“The upgrade reflects the state's recent legislative history of making timely appropriations even in the absence of an enacted budget, mitigating the risk, in our view, of a disruption in the timely payment of the MPEA's debt service. The rating also incorporates the state's general creditworthiness, which, under the new criteria, limits the final ratings on priority-lien tax revenue debt issued by the states,” S&P said at the time.
Illinois lawmakers passed special appropriations allowing the authority to avoid a payment defaults in 2016 and 2017 amid the impasse.
Fitch Ratings rates the bonds BBB-minus with a stable outlook. “In Fitch's view, these actions reflects the state's strong incentives to ensure timely debt service payments on the expansion project bonds and support close linkage to the state's IDR,” its analysts wrote. “The transfer to the bond trustee requires annual legislative appropriation, thereby capping the rating at one notch below the state of Illinois' Issuer Default Rating."
Moody’s was not asked to rate the new deal. The authority has $2.8 billion of debt.
S&P's investment grade rating should expand the universe of investors because some can only hold bonds that carry at least two investment grade ratings, MPEA director of treasury and capital management Jason Bormann said in the interview.
“So this will allow those investors to participate in the deal,” he said. “How much of an impact that will have on the interest rates we are able to achieve is hard to know,” but he said bankers told the agency they expect tighter spreads than what the agency saw on its last sale in 2017.
MPEA’s 11-year bond in its last sale paid a yield of 3.76%, a 167 basis point spread to the AAA benchmark, while the 25-year maturity yield of 4.85% landed at a 221bp spread to the AAA. In the authority’s 2012 deal before any downgrades, its 30-year current interest bond paid a 4.15% yield, 119 basis points over MMD.
S&P said its rating reflects the state’s strong and deep economic base, the state’s general credit and recent history of enacting timely appropriations even in the absence of an enacted budget that mitigates the risk of a debt service disruption. "The stable outlook reflects that the rating on the bonds is linked to the state general obligation rating," said S&P analyst Geoffrey Buswick.
MPEA has exhausted nearly all of its new money authority and current law caps the maximum amount of annual state sales tax deposits available for expansion project bonds at $350 million. The authority was pressing for state approval to expand the district in which a 1% restaurant tax is imposed and allow for new borrowing capacity, but it faltered amid opposition from Chicago Mayor Lori Lightfoot.
Clark, who is also serving as the agency’s acting chief executive officer since the September departure of Lori Healey, said no decision was made on whether to try again in the state’s 2020 legislative session.
The agency earlier this year used a new, unrated credit to back a $37 million deal privately placed with Morgan Stanley with a final 2041 maturity. The project revenue credit is secured by various authority operating revenues from parking facilities and an energy center as well as expected energy savings, so no state authority was needed.
The May deal financed lighting upgrades to the campus. A second deal is under consideration for additional work. Fitch said the project revenue bonds did not impact the project expansion credit as no tax revenues were pledged.