CHICAGO— The Lombard, Ill. Public Facilities Corp. is seeking to restructure the $190 million of debt it sold in 2005 to finance a suburban Chicago hotel and conference center that has long failed to live up to original expectations.
The village of Lombard’s public facilities arm, which sold the debt in 2005 and owns the facility, filed for Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Illinois Eastern Division on Friday. A hearing is set for Thursday.
The filing is part of restructuring agreements struck with ACA Financial Guaranty Corp. which is the controlling party based on indenture provisions, and holders of 70% of debt, according to the bankruptcy filing and trustee disclosure at https://emma.msrb.org/ER1072611-ER840218-ER1241107.pdf.
Under the proposed terms, holders of the A series would see a “potential” 77% recovery plus interest and B series bondholders would recoup nearly 87% plus interest under the offered bond exchanges. Holders of the subordinate C bonds with a claim that now stands at $72 million would be their holdings “cancelled and extinguished,” according to the bankruptcy filing.
The C bonds take a full haircut as the indenture requires that A and B holders be paid in full before any payments are made on the C bonds.
The Lombard village board approved the restructuring support agreements with the LPFC and other key stakeholders last week. “The restructuring of the LPFC’s debt will allow the hotel to continue to be an economic anchor for the Yorktown area, Lombard, and surrounding locations. It’s good news,” Village Manager Scott Niehaus said in a statement.
While better aligning the capital structure with estimated project revenues, the village is also hoping the restructuring provides a “roadmap” to stabilize and eventually improve its now junk ratings by demonstrating its “commitment to a solution.”
The affluent village of about 43,000 located west of Chicago lost its high-grade, double-A rating from S&P Global Ratings after it reneged on its appropriation pledge attached to the B series.
As part of the agreement, the village will reimburse the LPFC for the $3 million cost of a water main installation as part of the original construction project. The village will dip into its water/sewer capital reserves funds to cover the expense.
The village’s contribution “will fill in significant gaps in cash flow and add the critical funding layer necessary for capital needs, and ultimately resulting in a feasible plan to be presented for confirmation,” the bankruptcy filing read.
The LPFC, village finance officials, the insurer of a portion of the bonds, and other key bondholders including Nuveen Asset Management have been at the negotiating table for years as the project faltered and reserves were drained. A tender exchange failed in 2011 as did a restructuring proposal offered to bondholders in 2015.
The Chicago suburb since January 2014 has reneged on its pledge to cover revenue shortfalls needed to avoid defaults on a portion of the bonds as officials took the position that village taxpayers were not legally required to do so.
ACA last summer acted on its post-default rights as the controlling party and directed the trustee Amalgamated Bank of Chicago to accelerate bond repayment. The move was viewed by some sources familiar with negotiations as an effort to sway some holdouts in negotiations.
That meant the LPFC owed the full $66.5 million of outstanding principal and interest on the unrated and uninsured A-1 series. Another $55.2 million of accelerated principal and interest was owed an A-2 insured series that carried ACA’s single A rating.
In addition to insuring the bonds, ACA holds $19 million of the series. Both A series carry an indirect appropriation pledge from a village rebate agreement.
S&P last year downgraded the "issue-level" rating on the A-2 bonds to D from CC as no additional payments from ACA were expected following the payment acceleration. Other project bonds rated by the agency have previously been lowered to D.
Nearly $47 million of uninsured B series principal and interest also remains now due. The B bonds originally carried an AA-minus rating based on the village’s appropriation pledge.
No payments have been made on the deal's original subordinate C series for $29 million. The C series now total $72 million, according to filings.
The complex has failed to generate the revenue needed to support its debt. The facility includes 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 bankruptcy documents lay out the project’s struggles – blaming the lagging revenues on the recession and then growing competition from other facilities. The filing also lays out negotiations dating back to 2013 aimed at reaching a more affordable capital structure.
The project has generated annual income of between $5 million and $8 million since 2008 which “have enabled the debtor to remain current on the payment of all operating expenses of the project” but “the failure to meet projections ultimately impeded the payment of debt service, leaving the debtor without adequate funds to make needed capital improvements” to remain competitive, the filing read.
Negotiations eventually resulted in a consensus among a majority that includes 83.54% of the A-1 Bonds, 100% of the A- 2 Bonds, 56.58% of the B Bonds, and 43.12% of the C Bonds on the proposed restructuring.
The filing warns that foreclosure is a poor option and would likely result in a recovery of “one-third of the outstanding balance of the A Bonds, with no remaining funds available for any other bonds” with the restructuring likely providing “a far superior return for holders of the bonds and other parties.”
The restructuring under the plan of reorganization must be finalized by the end of the year, according to a trustee filing.
Obstacles remain. A key party that has not agreed to the restructuring and has expressed opposition to the Chapter 11 case is the asset manager, who developed and managed the project, according to the filing. The asset manager holds or controls more than 50% of the C Bonds.
In recent trades ahead of the bankruptcy filing, the B bonds traded in the 23 to 25 cents on the dollar range. The insured A bonds traded earlier this month at 85 to 89 cents on the dollar and the uninsured A bonds traded last year at 24 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA site.