Moody's Investors Service (Moody's) has downgraded the ratings on the Middlesex County Improvement Authority's Heldrich Hotel's (Hotel) $30 million 2005 Series A and $2.9 million 2007 Series A senior revenue bonds to B3 from B1. The oulook is negative. The downgrade concludes a review for possible downgrade that we commenced on December 23, 2008. The rating action reflects the continued weak operational and financial performance of the Hotel and Moody's opinion that performance will continue to deteriorate.
The 2005 Series A bonds, $37.3 million in 2005 Series B bonds, and $2.75 million in 2005 Series C bonds were issued to acquire the facilities, construct the hotel/conference center and pay for cost related to the financing. Moody's did not rate the subordinate 2005 Series B and junior 2005 Series C bonds. In addition, the 2007 Series A completion bonds, which were rated by Moody's, were issued to pay for cost overruns incurred during the construction of the hotel.
In 2008, hotel demand began softening as key clients made adjustments to conference and training schedules due to the slowing economy. Thus, 2008 revenue was significantly lower than initial projections. Financial performance of 2009 is expected to be weaker than that of 2008 with debt service coverage levels for the 2005 and 2007 Series A bonds near 1.0x debt service.
In order to pay senior debt service, the renewal and replacement reserve was not funded in 2008. Without regular deposits to this account, the Hotel would lack the resources needed for reinvestments in furniture, fixtures and equipment that are needed to maintain a competitive position and ensure continued high quality service. Management expects to make deposits to the renewal and replacement reserve according to a renovation schedule beginning in 2009.
The Heldrich Hotel project is a hotel/conference center that consists of 235 guest rooms and suite hotel, a full service restaurant and lounge, 500 seat ballroom, ground floor retail space, and a 50,000 square foot conference center and 30,000 square foot office and instructional space, which is leased by The Bloustein School of Planning and Public Policy and The John J. Heldrich Center for Workforce Development of Rutgers, The State University. The Heldrich project was designed as an executive conference center primarily serving the business meeting market, representing numerous large corporations and corporate headquarters located in the corridor from New York to Philadelphia.
The Hotel, which opened in March 2007, is located in the cultural center of downtown New Brunswick, New Jersey, which is undergoing redevelopment, (General Obligations rated A3) and is in the heart of the theater district. The Hotel benefits from its location in Central New Jersey with quick access to transportation including interstate highways, Amtrak train service, and Newark Airport and its close proximity to Manhattan, which is approximately 50 minutes from the Hotel by car or train.
The Heldrich Hotel Project's 2005 Series A and 2007 Series A bond ratings were assigned by evaluating factors believed to be relevant to the credit profile of the Hotel such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, and iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals. These attributes were compared against other issuers both within and outside of the Hotel's core peer group and the 2005 Series A and 2007 Series A bond ratings are believed to be comparable to ratings assigned to other issuers of similar credit risk.
The last rating action was on December 23, 2008 when the 2005 Series A bonds and 2007 Series A bonds were downgraded from Baa3 to B1.
