CHICAGO — The Chicago suburb of Lombard paid a steep price in the form of a six-notch downgrade after it refused to dip into its own coffers to cover a $912,000 debt-service shortfall on hotel and conference center debt that carries village support.
Standard & Poor's on Thursday lowered the village's issuer rating to BBB from AA and assigned a stable outlook. It also downgraded its GO certificates to BBB-minus, the lowest investment-grade level, from AA-minus.
"The downgrades reflect our view of the village board's vote" rejecting a request to make up for the shortfall in project revenues on the Lombard Public Facilities Corp.'s Series A bonds, S&P wrote.
Under terms of a tax rebate agreement that paved the way for $190 million of bonds in 2005, the village pledged to cover a debt-service shortfall on the A bonds before the formal reserve is tapped. The pledge is subject to appropriation. "Given the hotel and conference center project's financial difficulties, we do not expect rating improvement within the outlook's two-year horizon," analysts wrote.
The rating agency also lowered $53 million of Series A bonds and $45 million of Series B LPFC bonds to CCC from B-minus. In the event of an actual payment default, S&P projects a recovery rate for investors of between 30% and 50%.
The village board voted unanimously against appropriating any of its own funds to cover the shortfall upon the recommendation of village staff. Standard & Poor's said it suspects that the vote "may be an effort to encourage bondholders to restructure the project debt."
Finance director Tim Sexton said Friday other financial and policy factors drove the decision. "The board was fully aware that we were likely facing a downgrade, we just didn't know how far," said Sexton, who recommended a no vote. "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."
Officials still hope to eventually restructure the debt to buy more time for business to pick up following a failed tender offer for the bonds this past spring.
Lombard typically issues about $4.2 million of new-money debt annually with a rapid amortization schedule. No decisions have been made on 2012 issuance and whether the downgrade will affect it.
The LPFC drew a total of $1.5 million from reserves to cover its Jan. 1 debt service payments. The agency, which owns the struggling hotel and conference center located 20 miles west of downtown Chicago, used $911,000 in reserves to cover a shortfall on $118 million of A bonds and $636,000 on $43 million of B bonds. The village's payment pledge kicks in before the debt service reserve on the A bonds. The Series B bonds carry an appropriation pledge from the village but reserves are tapped first. No payment was made on $29 million of unsecured Series C bonds.