CHICAGO — The Lombard, Ill., Public Facilities Corp. drew $1.8 million from reserves to cover debt-service payments owed this month on $190 million of hotel and conference center debt after the village board refused for the second time this year to honor a pledge that supports a portion of the bonds.
The affluent suburb's financial reputation and credit have suffered for its decisions on the debt tied to the LPFC-owned complex that has struggled to remain solvent. Standard & Poor's hit the village of Lombard with a six-notch downgrade in January after it refused to dip into its own coffers to cover a portion of debt service payments, and last month investors shunned the village's sale of limited-tax general obligation debt certificates that lacked a full faith and credit pledge.
The village pulled $10 million of new-money certificates from the market on June 21. The certificates were to be secured by any legally available and appropriated funds, but lacked a firmer full faith and credit pledge.
"They were unable to sell the bonds" over concerns tied to the village's action on the hotel bonds, finance director Timothy Sexton said of the transaction's underwriter, Robert W. Baird & Co. "We knew it was a possibility."
Sexton said representatives from Baird and the village's financial adviser, Speer Financial Inc., had believed that the village could successfully attract buyers with the limited pledge. A representative from Speer said initially there was buyer interest. Baird officials could not immediately be reached to comment.
Proceeds of the seven-year certificates would have financed capital projects. The village did not issue debt last year, but traditionally it has tapped the tax-exempt market annually to finance capital projects. "We wanted to take advantage of the low interest rates," Sexton said.
The suburb can manage with limited market access, given its strong balance sheet and $30 million in reserves. A Speer representative said the village could attract buyers by using a different structure, such as one with an alternative revenue source pledge. With non-home-rule status, its use of a full faith and credit pledge is limited due to property tax caps.
With heightened attention on the pitfalls of GO-like structures without a full faith and credit pledge in municipal bankruptcies, Richard Ciccarone, chief research analyst at McDonnell Investment Management, warned that "a municipality has to provide the strongest security it has when there is any distress" associated with its credit.
Standard & Poor's in January lowered the village's issuer rating to BBB from AA and downgraded its certificates to BBB-minus, the lowest investment-grade level, from AA-minus after it refused to dip into its own coffers to cover a shortfall in project revenues. A total of $1.5 million was drawn from debt service reserves to cover the January payment. Though reserves were tapped for previous payments, it was not until January that the village backstop was triggered.
On the latest July 1 payment, the corporation used $1.3 million to cover a gap needed to make a $3.7 million payment on $118 million of Series A bonds. Under terms of a tax rebate agreement that paved the way for $190 million issue in 2005, the village pledged to cover a debt service shortfall on the Series A bonds before formal reserves are tapped. The pledge is subject to appropriation. About $7.3 million remains in Series A reserves.
The corporation also tapped $557,000 from reserves to make up a shortfall in a $1.1 million payment owed on $43 million of Series B bonds on July 1. While the village's payment pledge kicks in before the debt service reserve on the A bonds, the B bonds carry an appropriation pledge from the village but reserves are tapped first. About $1.7 million remains in reserves. No payment was made on $29 million of unsecured Series C bonds.
Standard & Poor's analysts in January downgraded the portion of hotel and convention bonds rated by the agency to CCC from B-minus. In the event of an actual payment default, Standard & Poor's projects a recovery rate for investors of between 30% and 50%.
"The board looked at all the factors, financial conditions, future projections, and did what they felt was in the best interest of residents of Lombard," Sexton said in January.
Village officials still hope to restructure the debt to buy time for business to pick up. The LPFC invited holders of Series A and C bonds to tender their bonds at a loss last year. Too few bondholders agreed to the offering price and the results were rejected by the agency. Without a restructuring or some other action, prospects remain uncertain.
The village board last month formed a special advisory committee to review its options.
The project includes an 18-story, 500-room hotel operated by Westin Hotels & Resorts, a 55,500-square-foot convention center and two restaurants. It has struggled to meet initial revenue projections.
If the project were eventually to declare bankruptcy, the Series A and B holders have a mortgage claim. Portions of the Series A bonds traded most recently last month at 54 cents on the dollar while Series B bonds traded at 52 cents on the dollar.