Lombard deal marks effort to rebuild reputation after reneging on pledge
CHICAGO— A Chicago suburb that reneged on its pledge to support bonds sold for a hotel and conference center wants to rebuild its market reputation, starting with a new issue that offers a belt-and-suspenders structure designed to show it will honor its obligations.
Lombard will sell on Thursday $3.9 million of general obligation bonds under the state’s GO-alternate revenue source structure with sales taxes and water and sewer system fees also pledged to repayment. The bonds are unrated.
S&P Global Ratings sent the village's rating to junk after it refused to make good on pledges tied to a $190 million 2005 issue sold through the Lombard Public Facilities Corp. The project filed for Chapter 11 last year and emerged earlier this year.
“We want to open the door to the market,” Village Manager Scott Niehaus during a joint interview with Finance Director Tim Sexton. “The village wanted a structure that would signal to investors there is a willingness to pay. It’s about making sure bondholders feel comfortable with the secure structure.”
The deal features a lockbox on a portion of pledged revenues. Maturities only go out to 2024. Pledged non-home rule sales tax will bypass the village, flowing directly into an escrow account managed by trustee Amalgamated Bank from the Illinois Department of Revenue and local county collectors.
Robert W. Baird & Co. Inc. is the underwriter. Speer Financial Inc. is the advisor. Chapman and Cutler LLP is bond counsel. Miller Canfield Paddock and Stone Plc is disclosure counsel.
“They walked away from their lenders,” said Matt Fabian, partner at Municipal Market Analytics. "In a perfect world Lombard would be shut out of the market for a decade or longer but in the real world there is just too much money needing investment in tax-exempt bonds. The security improvements are not trivial and there are much riskier places” for investors.
Even If there is a spread penalty, the costs will still be competitive with other borrowing options because of the low-rate environment, Fabian added.
The financial team, bankers, and advisors held an investors’ call last week to explain the structure and village’s efforts. The village accepts that investors may demand a penalty but the deal’s short maturity should limit the price tag.
“We are going to have to see what investors come in at,” Sexton said.
Village leaders did not consider a direct placement or additional state revolving funds loans because they saw the borrowing as an “efficient” means to reintroduce the village to the market, Niehaus and Sexton said. An Illinois Environmental Protection Agency loan also would have taken more time.
While rebuilding its investor relationships is the primary goal, the village knows S&P is watching and village officials have said they want Lombard to regain its investment grade by showing it can honor it obligations.
Monthly transfers of sales taxes will be made to the escrow, and revenue not needed for debt service would then be freed for village use. Under the alternate revenue structure, a property tax is levied but it’s the village’s intention to abate that tax. Sales taxes will repay the bonds but system fees are also pledged.
Non-home rule sales taxes totaled $9.2 million last year. Over the last decade, yearly collections declined twice with growth in all other years. Collections provide at least eight times debt service coverage.
Proceeds will finance waterworks and sewerage system improvements. After the sale, the village will have $7 million of GO debt outstanding. It also has about $10.4 million of outstanding loans through the state’s revolving loan program administered by the IEPA.
“The village does not intend to issue additional debt within the next twelve months,” the offering statement says.
The village carried $23 million in fund balances last year including $8.5 million that was unassigned. The balance rose in 2017 as the village collected $44 million in revenue with expenditures at $41 million. It is operating on a $45 million general fund budget this year.
The village’s financials support its ability to pay, but in the case of the hotel/conference debt, the market viewed the village’s default on its obligations as a willingness-to-pay issue.
Lombard established the Lombard Public Facilities Corp. to issue the bonds and manage plans for the Westin Lombard Yorktown Center with village support through a tax rebate agreement and its appropriation pledge.
The board that endorsed the hotel project believed it would spur economic development and was worth the risk to the village. The facility has a 500-room hotel, two restaurants, 39,000 square feet of meeting and convention space, a 25-meter indoor swimming pool and fitness center, and a 675-car, four-story parking deck.
The hotel opened in 2007, just in time for a recession, and never generated enough revenue to meet debt service.
S&P in 2012 dropped the village six notches to BBB from AA for failing to make up a debt service shortfall on a portion of the bonds instead allowing for bond reserves to be tapped. It dropped Lombard to speculative-grade B in February 2014, when the village reneged on its appropriation pledge causing a payment default.
After years of failed negotiations and restructuring efforts, village and corporation officials struck a deal with key bondholders and the insurer on a portion of the bonds and sought the bankruptcy’s court’s blessing in a July 2017 Chapter 11 filing.
A bond exchange was conducted for $140 million of new 50-year, tax-exempt debt. The village's appropriation pledge is not attached. The exchange through the Wisconsin Public Finance Authority allowed for a March 15 effective date for the confirmation plan.
The corporation and ACA Financial Guaranty Corp. had been in discussions since late 2013 on a restructuring. Village officials said in 2017 a new board was in place that was more willing to put some city funds on the line to resolve the issue.
The restructuring resulted in bondholder recovery rates between 76% and 86% on three series, with a subordinated $29 million series taking a near total loss. The village paid $300,000 in legal expenses.
As part of the reorganization, the village board approved a restructuring agreement that provides $3 million for facility improvements and up to a total of $3.7 million in tax-increment financing support in the coming years for site infrastructure improvements. The village will also continue to contribute revenue from a special 1% so-called Places for Eating Tax enacted last year through 2021 and a tax rebate of about $1 million remains in place.
S&P earlier this year cautioned that even with the restructuring completed, “it takes a fairly significant amount of time” to see any upward ratings action after defaulting on an appropriation obligation.
The long road back is evidenced by two other Midwest credits.
S&P in March 2017 raised Vadnais Heights, Minnesota, three notches to BB from B, still two notches below investment grade, in recognition of the city’s “continued commitment to meet its debt obligations.” The city voted in 2012 against appropriating funds needed to cover debt service on bonds sold in 2010 to finance a sports facility.
Moberly, Missouri, was raised two notches by S&P to BB-minus from B in 2016 and then won back its investment grade in a four-notch April upgrade to BBB. S&P cut the city to speculative grade for failing to appropriate needed funds in 2011 to cover debt service on bonds sold to finance an artificial sweetener plant. The outlook remains positive.