CHICAGO — Illinois has agreed to the Illinois Medical District Commission’s request that a $4.5 million capital grant be diverted to cure a debt-service coverage default and ensure bondholders receive full payment later this year on $40 million of state moral obligation-backed bonds.

The Illinois Finance Authority issued the bonds in 2006 on the 70-year-old commission’s behalf as it sought to undertake a massive city-, county-, and state-supported expansion of its campus on the near-west side of Chicago.

The issue included $7.5 million of tax-exempt paper and $32.5 million of taxable securities that were rated triple-A based on now-defunct bond insurance. Because the early years of the project were considered risky as properties were leased, the state put its moral obligation pledge behind the bonds to keep the borrowing costs low and secure insurance coverage. Revenues generated by lease payments from tenants of the new facilities and property sales are pledged to repay the bonds.

The district has struggled to generate the revenues needed to cover debt service, blaming the economy for its woes. The district had $3.2 million of operating revenues in fiscal 2011, for a $526,000 loss compared to a $287,000 loss a year earlier, according to a state audit.

The commission’s board has come under criticism for turning to commercial property leases to bolster revenues. This week Gov. Pat Quinn and Cook County Board President Toni Preckwinkle announced a series of new board appointments, with the city expected to follow suit.

The trustee, Amalgamated Bank of Chicago, reported in a bondholder notice last week that the governor’s office of management and budget had agreed to the commission’s request that a $4.5 million grant it was awarded for capital costs instead be deposited into the issue’s bond fund.

The state’s letter also “directs the trustee to apply such funds to pay the principal of and interest on the bonds” for payments due in September 2012 and in March and September 2013, with any remaining amounts going to the March 2014 payment.

In January, the commission notified the trustee of state auditor general William Holland’s finding that it had failed to comply with terms of its loan agreement for the fiscal year ending June 30, 2011, because debt service coverage had fallen to 0.31 times. Under the loan agreement, the commission must maintain a coverage ratio of at least 1.05 times.

The commission in February formally told the trustee that it had failed to meet the required debt-service coverage ratio and the trustee in turn notified the commission that the shortfall triggered a covenant default event under its loan agreement.

The commission’s February letter also informed the trustee that discussions were underway with the Illinois Finance Authority and the state budget office “to structure a solution that will allow the [commission] to meet and maintain the required debt- service coverage ratio going forward,” the letter read.

The 560-acre district — which includes Cook County’s Stroger Hospital, University of Illinois Medical Center, Rush University Medical Center and a veteran’s medical center — used the bond proceeds to fund the costs of acquiring and renovating two large properties and several smaller parcels within its technology park, with plans for a graduate medical-biological research facility.

The aim of the project was to complement the district’s current laboratory, research, and office facilities and to provide room to expand, in keeping with the district’s mission to attract medically related commerce, research and technology firms to the area by providing good facilities.

In addition to the hospitals, the district, one of the oldest and largest in the country, includes a technology park, a research center, the American Red Cross of Greater Chicago, the Illinois State Police Forensic Science Center, a veterans’ medical center, and the UIC West Side Research Center.

William Blair & Co. was the senior manager and Chapman and Cutler LLP was bond counsel.

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