Illinois stadium agency eyes debt restructuring amid hotel tax collapse
The Illinois Sports Facilities Authority is sounding alarms over its dismal fiscal picture heading into fiscal 2022 in the absence of a strong economic recovery that fuels a big pickup in hotel tax revenues or a debt restructuring to eases near-term pressures.
Bolstered by the use of a special reserves, the junk-rated authority has sufficient funds in hand to cover the fiscal 2021 debt service payments that were due this week and on June 15, 2021. That’s despite the battering hotel tax revenues have taken due to pandemic-driven economic shutdowns, canceled conventions, and lackluster tourism.
The authority owns and operates and issued $150 million of bonds in 1989 for Guaranteed Rate Field, home of Major League Baseball’s White Sox, and issued $400 million of 2001 bonds that financed the renovation of Soldier Field, the Chicago Park District-owned home of the National Football League’s Chicago Bears. It has about $430 million outstanding.
“We are in the midst of COVID and COVID has devastated the tourism and hospitality industry and ISFA has fallen prey to that devastation,” ISFA chief financial officer Dana Phillips Goodum told board members in an update of fiscal 2021 operations through September at a board meeting Thursday. Revenues were down by 90.7% through September.
“We are not in jeopardy” of a default as “we do have ample reserves to get us through this fiscal year as well as with the state advance we are receiving along with the subsidy,” Goodum said.
A “state advance” of up to 60% of a 5% statewide hotel tax is pledged to the bonds but the agency must repay most of that advance back at the June 30 fiscal year end. The authority’s revenues come from a local 2% hotel tax, a $5 million annual state subsidy and a $5 million city subsidy.
Chicago is on the hook should the authority’s 2% tax on hotels combined with the subsidies fall short of what’s needed to eventually repay the “state advance" and officials warned it looks likely that the city will face a payment. The state can automatically withdraw the amount needed from the city’s share of income tax revenues.
S&P Global Ratings’ July downgrade that cut the authority to junk echoed Goodum’s position on fiscal 2021.
“The downgrade reflects lower coverage and the need to use non-pledged revenues to pay fiscal 2021 debt service,” S&P said in dropping its underlying rating to BB-plus from BBB. Many series carry bond insurance. “We believe that a combination of available non-pledged ISFA liquidity and pledged state receipts will be sufficient to avoid a default in fiscal 2021.”
S&P noted that ISFA had $38.5 million in available hotel tax variation reserve account funds at the start of 2021 but intended to draw on $25 million to cover fiscal 2021 obligations.
While the agency can meet fiscal 2021 obligations through June 30 with the help of reserves, it still expects Chicago will be called on to cover a shortfall in hotel tax revenues even after taking steps to ease that risk by requesting a lower-than-needed “state advance” earlier this year. And next year is more worrisome absent an economic recovery or a debt restructuring.
“We believe that based on the way COVID is moving that we will probably have a deficiency at the end of year” that the city “will be on the hook for,” Goodum said.
The authority is not yet sure how much will fall on the city to cover a state advance amount of $28.5 million. The local hotel tax is currently projected to total $9.4 million.
Chicago Mayor Lori Lightfoot’s administration wants to avoid any new burden given it’s just closed a $2 billion gap in its 2020 and 2021 budgets with much of due to pandemic-related tax hits.
“The sports facilities authority needs a debt restructuring. They have needed a debt restructuring even before COVID-19 and given the fact that we are being impacted by COVID-19 by way of the revenues that help support ISFA, a debt restructuring is an appropriate tool that a lot of various entities have taken advantage of," including the Metropolitan Pier and Exposition Authority, Chicago Chief Financial Officer Jennie Huang Bennett said in a recent interview.
Legislative approval would be need to extend the debt maturity.
Bennett cited state support for measures that allowed the Met Pier authority, which relies on economically sensitive taxes and whose convention business ground to a halt in March, that paved the way for its $160 million refunding and restructuring over the summer. The deal pushed off near-term debt service and provided working capital.
“We are in discussions with the city and the governor’s office to ask for legislative relief to allow for restructuring that would reduce debt service in 2021 and 2022,” ISFA general counsel Maria Saldana said in an email.
Refundings have eased past pressures but a restructuring would provide the best long-term fix as debt service ramps up. The agency owes $46.5 million in debt service for fiscal 2021. About $49 million is due in 2022, $59 million is due in 2027, $81 million in 2031, and $87 million in 2032 when all debt is retired.
The authority collected $38.6 million in hotel tax revenue in fiscal 2020, down from $54.7 million for 2019, according to its audited financial statements presented at the board meeting. Total revenues when adding in other income and a $5 million city subsidy and $5 million state subsidy were $51.7 million, down from $68.4 million.
The structure requiring the city to cover a shortfall was put in place for the Soldier Field borrowing during former Mayor Richard M. Daley’s tenure. About $200,000 was needed in 2011 before a refinancing eased pressures but it raised the ire of Daley’s successor, Rahm Emanuel.
The ISFA moved earlier this year to ease the risk of a city hit for fiscal 2021 when officials submitted state hotel tax advance request known as the “chairman’s certificate” that for the first time sought an amount less than what’s owed for debt service in fiscal 2021 with a plan already in place to tap reserves.
Illinois annually appropriates 60% of the 5% statewide hotel tax to cover the “chairman's certificate” requested amount and that request has historically has provided 1.5 times annual debt service coverage.
But the chairman’s certificate requested for fiscal 2021 was just $38.5 million, including the $5 million city subsidy and $5 million state subsidy, while debt service amounts to $46.5 million. The authority owes $10 million this month and $36.5 million in June 2021.
Total statewide hotel tax receipts were $247 million in fiscal 2019, of which $148.2 million was available to cover ISFA's statutory advance. For fiscal 2020, total statewide hotel tax collections were $209.2 million, of which $125.5 million, a 15.5% drop, were available to cover the ISFA chairman's certificate. The fiscal 2021 projection is for collections of $154.2 million with $92.5 million available, a 26% drop.
The intent of the lower than needed request was to provide budgetary relief to the city.
“In our view, the reliance on nonpledged revenues to make fiscal 2021 debt service weakens the credit,” S&P said in July. “We also view the influence of Chicago's budget conditions on the certificate request amount as a credit weakness.”
Efforts on a debt restructuring will fall to a new board leader.
Manuel “Manny” Sanchez, whose firm Sanchez Daniels & Hoffman does bond work, told board members he was tendering his resignation.
Sanchez was named to the post by former Gov. Bruce Rauner so his resignation paves the way for Gov. J.B. Pritzker to make his own pick. The board is comprised of three mayoral appointees and three gubernatorial appointees with the governor picking the chairperson with the mayor’s input. Past mayors and governors have not always agreed on leadership picks for either ISFA.
Pritzker’s office did not respond to an email to comment on the authority’s leadership or on whether the administration supported a debt restructuring.
Fitch Ratings also rates the ISFA at junk but that’s due to the state link.
In early April, Fitch affirmed the rating at BBB-minus but revised the outlook to negative from stable to reflect “the potential that hotel tax collections continue to decline versus the prior year well into the start of fiscal 2021.”
Later in the month, Fitch cut the rating to junk BB-plus after it downgraded Illinois to BBB-minus as the rating is capped at one notch below the state to reflect that bondholder payments are subject to a state appropriation. Fitch affirmed the rating in October when it affirmed the state.
The authority last borrowed in 2019 after a five-year absence with a $130 million refunding.