CHICAGO — The Lombard Public Facilities Corp. in Illinois is exploring its options to buy more time for business to pick up at its bond-financed hotel and conference center after too few investors were willing to tender their bonds at the agency’s asking price.
“Unfortunately, the bonds tendered were not sufficient to produce the benefits needed,” said Lombard finance director Tim Sexton. “We are exploring our options and actively monitoring the project.”
The LPFC issued a total of $187 million for the project, which has failed to generate sufficient revenues to repay the debt.
Earlier this year, the agency invited holders of $144 million of 2005 series A and C bonds to tender their bonds at a loss while holders of $43 million of Series 2005B bonds — which carry an appropriation pledge from the village — were not part of the tender.
The tender offered holders $670 per $1,000 principal, plus accrued interest, for the $63.9 million Series 2005A-1 and the $54 million Series 2005A-2. It offered $200 per $1,000 principal, and no accrued interest, for the $6 million Series 2005C-1, $9.7 million Series 2005C-3, Series $5 million 2006 C-3, and Series $1.8 million 2006C-3.
A successful tender based on the village’s restructuring plan required 75% participation of the A holders and 100% participation of the C holders. The LPFC planned to fund the tender with a $70 million refunding bond issue that the village intended to put its appropriation pledge behind. That would have increased its risk but also garnered the bonds a AA-minus rating from Standard & Poor’s.
The tender invitation was to end on March 31 but it was extended to April 14 to give investors more time to review the restructuring proposal in hopes of luring more holders. The agency then extended the deadline a second time to April 28. The amount of bonds tendered still fell short, but officials sought extra time to consider whether the restructuring plan could still work at the lower threshold. Officials decided it could not, and rejected the results.
“Obviously, we are disappointed,” Sexton said, adding that officials believed the restructuring plan offered the best solution for the village, the project, and bondholders. “The current capital structure based on the most recent projections is untenable.”
The village and the LPFC could try another tender, although there are not immediate plans to do so. Or they could attempt another form of restructuring. If the project were eventually to declare bankruptcy, the Series A and B holders have a mortgage claim.
Sexton declined to say how many bondholders accepted the tender or reasons why some did not. Bondholders have divided interests given the project’s cash flows and long-term prospects.
Piper Jaffray & Co. served as the dealer agent. Speer Financial Inc. is serving as a financial consultant.
The next debt service payment is due July 1. The A and B holders will be paid in full even though a shortfall is expected in project revenues. Reserves kick in first — before the village’s appropriation — on the B bonds.
The village provides some limited support for the A bonds in the form of a $2 million reserve it has pledged to replenish during a ramp-up period. That kicks in before reserves. If project revenues are insufficient to cover debt service, Sexton said a payment request would go before the Lombard council in mid June.
About $9.6 million remains in reserves tied to the Series A bonds and $3.2 million on the B bonds. Another $3.7 million is in a hotel and restaurant operating reserve, but $1.25 million is available for debt service.
Another $1.2 million is in a hotel and restaurant supplemental reserve and $2 million remains in the village-funded supplemental reserve on the A bonds. Those remain in place until project revenues provide 1.5 times debt-service coverage for three consecutive years
The Series C issue is considered an unsecured credit and there are no remaining reserves. However, under an agreement with the developer a portion of asset-management fees paid by the village go to bondholders should project revenues fall short. They can expect to receive about 30% of July’s $450,000 payment, Sexton said.
The trustee drew about $1 million from operating reserves to fully cover the January debt-service payments owed on the Series A and B bonds.
Without a restructuring, village officials warn that substantial debt-service shortfalls loom and the failure to finance management and capital expenses could hurt the project’s viability, resulting in further shortfalls.
The original bonds financed development and construction of the 500-room Westin Lombard hotel, which includes a 55,500-square-foot conference center, a parking structure, and two full-service restaurants.
Lombard created the LPFC to own and finance the project, undertaken to bolster economic development in the village, which is located just west of Chicago and O’Hare International Airport in DuPage County.
The facilities opened in 2007 but have struggled to meet original revenue projections, forcing officials to dip into reserves to fully cover recent debt-service payments. Village officials put much of the blame for the hotel’s struggles on the 2008 financial crisis and recession.
Occupancy isn’t expected to exceed 68% over the long term and the restaurant — which faces tough competition in the area — has fallen short of original projections that it would contribute 20% of the project’s net income.
As a result of the project’s troubles, the rated tranches of the bonds have sunk into junk-bond territory and Lombard’s strong credit rating has taken a hit due to the strain of supporting the project.
After announcement of the tender earlier this month, Standard & Poor’s lowered its issuer ratings on the LPFC bonds to CC from B-minus and assigned a negative outlook. The Series B bonds, which carry the appropriation pledge, were downgraded to B-minus with a negative outlook from AA last August by Standard & Poor’s.
The agency downgraded the village’s issuer credit rating one notch to AA with a negative outlook in December.