CHICAGO - The Illinois Sports Facilities Authority is playing up the rare tax-exemption from state income taxes and sturdy repayment protections offered by this week's $285 million refunding bond sale.
The bonds, which carry an appropriation pledge from Illinois, the nation's lowest rated state, are expected to price Wednesday with Barclays and Goldman Sachs serving as joint book running senior managers. The sale will current- and advance-refund a portion of the agency's 2001 Soldier Field bonds, its 2003 taxable issue, and an issue from 2008.
The bonds are secured by state tax payments, which include an advance from a portion of the 5% statewide hotel tax in an amount tied to debt service needs and $10 million in annual state and city of Chicago subsidies. The state tax payments are subject to annual appropriation. The authority then reimburses the state for the advance with its own 2% tax on city hotels.
Ahead of the sale, Fitch Ratings affirmed the state tax-supported bonds' BBB-plus rating and negative outlook. The rating agency notches the bonds one level off the state's rating. Standard & Poor's affirmed the bonds A rating and stable outlook. The bonds offer an exemption to both state and federal income taxes, unlike most from Illinois which offer only a federal tax-exemption. S&P last week revised its outlook on the state's A-minus rating to negative, reflecting analysts' dim view of the state's new budget and concerns over whether retirement benefit reforms will withstand a legal test.
The authority declined to answer questions about the transaction ahead of the sale. An investor roadshow presentation attached to the offering statement stressed the bond structural strengths.
Solid security features and strong sources of payment that offset state appropriation risks "contribute to a strong and stable credit," the authority's executive director Kelly Kraft said in the roadshow. "Pledged funds and sources of payments bring ample financial resources to meet debt service and other obligations of the authority."
The authority has no future debt issuance plans and capital needs are paid for on a pay-as-you-go basis.
Several investors and traders predicted the bonds would face some penalty as any credit tied to the state typically does, but said it was difficult to assess the level given the deal's limited size, market factors, and impact from Standard & Poor's shift in the state's outlook. That drove up penalties for Illinois in secondary market trading.
"Everyone [issuers] is trying to run from the Illinois name, but you can't do it," said Thomas Spalding, senior investment officer at Nuveen Investments Inc. "There will be some penalty."
The authority owns and operates U.S. Cellular Field, home of the Chicago White Sox, and served as issuer for $400 million issue for the Chicago Park District-owned Soldier Field, home of the Chicago Bears, in 2001. The final maturity is tied to the Bears' lease with the park district as is the state tax pledge so it can't push out maturities.
The bonds will generate traditional present value savings throughout the maturity schedule which runs through 2032. The savings will help ease the challenges of managing an escalating debt service schedule with an economically sensitive revenue stream.
The authority's primary revenue stream which goes to repay the state advance comes from its city hotel tax, which can be volatile. The agency has been under pressure from Mayor Rahm Emmanuel to reduce the chances it will have to tap a Chicago income tax backstop to cover debt service on its Soldier Field renovation bonds as the authority did in 2011 when $185,000 was needed.
The payment structure, while complex in the flow of funds, helps mitigate appropriation risk, the authority is stressing.
In the event of a shortfall in ISFA hotel taxes because the city's share of state income taxes are tapped to repay the state advance "there is no impact on the state's own fiscal operations based on the requirement to appropriate debt service for the bonds beyond its $5 million subsidy," Fitch said.
The authority is also stressing the strength of its hotel tax collections which set a record last year at $41 million. While volatile, they have recovered from a 2010 drop. The authority's hotel tax averaged 5% annual growth over the last 20 years but average growth is only 2% when during the last five years due to a steep fall during the recession.
Pledged revenues provide a minimum of 1.35 times coverage through the life of the bonds but that's before the city's share of income taxes -- $250 million in 2013 - are counted.
The authority pledges to use its revenues which come from its hotel tax to repay bondholders also helping to offset state appropriation risk. The authority also maintains a $20 million hotel tax reserve to pay any obligations in the event that its hotel revenues falter.
The bonds carry a non-impairment pledge from the state that it will not limit or impair the terms of the authority contract with bondholders.
Standard & Poor's said its rating reflects solid coverage of annual debt service and scheduled appropriations under conservative growth assumptions, the convention and tourism industry's strengths, and bond provisions that ensure deposit of state tax payments in the authority's fund and can only be used for authority projects.
The rating also reflects the annual appropriation risk, the narrow revenue stream pledged to bondholders, and a weak additional bonds test.