CHICAGO - The Indianapolis Local Public Improvement Bond Bank plans to enter the market Tuesday with $59.6 million of federally tax-exempt bonds to help finance a long-planned 1,000-room hotel that's part of the city's convention center expansion and downtown redevelopment plan.

The transaction is the bond bank's first under new Mayor Greg Ballard and new bond bank executive director Kevin Taylor, and also the first of several issues planned over the coming months.

City Securities Corp. is senior manager on the deal, and SBK-Brooks Investment Corp. and KeyBank Capital Markets round out the underwriting team. Barnes & Thornburg LLP is bond counsel, and Crowe Chizek and Co. LLC is the financial adviser.

"This is the culmination of years of planning, it's not come about just in the last three months, but it is an indication of the current administration's commitment to the projects," said Taylor.

A Republican political newcomer, Ballard's defeat last November of incumbent Bart Peterson came as a surprise to many political observers. Peterson's decision in mid-2007 to implement an income tax increase was widely considered a key reason for his loss. Ballard campaigned heavily against taxes - favoring a total elimination of property taxes - and taking on new debt.

The new hotel, to be owned by a franchisee of the J.W. Marriott Corp., is a key part of the city's long-planned strategy to expand the Indiana Convention Center. The center is located just blocks from the new Indianapolis Colts Stadium, which is scheduled to open Aug. 15 and is part of a larger downtown redevelopment plan. The total cost for the hotel project is estimated at $325 million.

"It's an indication of the significance of this project to the development of downtown and the strategic expansion of the convention center," he said.

The fixed-rate bonds will be secured by three revenue sources. While officials expect the bonds to be repaid through tax increment revenue - the hotel is located in a tax increment financing district - the city is also providing its moral obligation pledge and a special benefits property tax that can be levied if necessary.

"The real security - and the reason we'll be getting very high ratings on this - is the property tax and the moral obligation," said City Securities banker Jim Merten. "The TIF is enough to pay it, but with the property tax and moral obligation we'll get the best ratings and the lowest interest rates."

Over the last decade, some convention center hotels, such as one in St. Louis that relied solely on hotel revenues to repay debt, have struggled as occupancy and rate levels failed to meet projections, in some cases due to the downturn after the 2001 terrorist attacks. That has prompted investors to seek stronger security on new deals.

Debt service is expected to total around $4 million a year. Tax increment revenue across the TIF district, which includes several other bond projects, is expected to generate $41.5 million in 2008 and up to $47.6 million by 2037, according to a report by Crowe Chizek included in the bond documents. In a TIF district, property taxes are frozen and any new revenue goes to fund improvements within the district.

The property tax pledge comes just months after the Indiana General Assembly implemented widespread property tax reform that is expected to mean a dramatic drop in property tax revenue for most municipalities across the state. How the reform may impact TIF revenues is still unknown but could be considered a risk to bondholders, the Crowe Chizek report noted.

The bond bank's ambitious timetable includes a ground-breaking scheduled for the first week of June, just days after the end of the Indianapolis 500 race. In addition to the main hotel, the project will include two nearby smaller hotels, a pedestrian skywalk to the convention center, and an underground garage. Once completed, the hotel will boast the largest ballroom in the Midwest, Taylor said.

The hotel deal kicks off a series of upcoming transactions for the local bond bank, which has about $3.3 billion in outstanding issues.

Within the next several months, the bank plans to enter the market with a $50 million water works issue that will refund existing auction-rate debt, as well as a $45 million refunding of variable-rate debt for savings.

In June, the bank plans to begin selling $100 million of bonds - perhaps in more than one issue - to finance the final construction of a new midfield terminal for the Indianapolis International Airport. The bank is also considering refunding other outstanding fixed-rate debt, Taylor said.


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