CHICAGO — The Franklin County Convention Facilities Authority will enter the market today with $160 million of lease-backed taxable Build America Bonds to finance construction of a Hilton hotel in downtown Columbus, adjacent to the Ohio city’s convention center.
The double-A rated bonds are backed by a bed tax and revenue generated by the new Columbus Hilton Downtown, and also feature an annual appropriation pledge from triple-A rated Franklin County, a key consideration for investors and a benefit for the authority.
The structure of the debt postpones principal payments for the first six years — a move designed to give the hotel a boost during its early years, officials said.
Unlike many convention centers across the state and in the Midwest, business at the Greater Columbus Convention Center has remained relatively strong during the recession, according to William Jennison, the authority’s executive director. The chief problem in attracting more business has been scarcity of hotel space, he said.
“This hotel will be a big piece and help us get where we need to be on the hotel side,” Jennison said. “We’re one of the more successful convention centers in Ohio and we’re looking to expand our reach.”
The new 532-room hotel — which will join a nearby 631-room Hyatt — is expected to boost convention business by roughly 17%, according to bond documents. The new hotel will be owned by the authority and is part of its larger marketing effort to attract more national and regional conventions to Columbus, which competes for business with cities like Louisville, Indianapolis, Charlotte, and Pittsburgh, officials said.
PNC Capital Markets LLC is lead manager on the deal, with Rice Financial Products Co. and Huntington Investment Co. acting as co-seniors. Peck, Shaffer & Williams LLP is bond counsel.
The convention authority hired Atlanta-based Strategic Advisory Group LLC as its adviser for the project based on its experience putting together publicly funded hotel deals, Jennison said.
The finance team could opt to issue some piece of the deal as traditional tax-exempt debt, but as of Monday the plan was to offer the entire $160 million as taxable BABs, officials said. The 30-year debt is expected to feature a mix of serials that mature through 2020 and term bonds that mature in 2025, 2030, and 2042. The authority is expecting to pay a net interest rate of around 4%, Jennison said.
Under the current structure, the authority would not pay interest for the first three years of the project — during the construction phase, when no revenue will be coming in — and will then make only interest payments for the next three years.
Principal payments will begin in 2016, when the hotel is expected to begin to generate an operating income, according to Jennison.
“The hotel consultants advised us that if hotels struggle it’s usually in the early years, so we said let’s structure this so we give it the best chance in the early years and we can also build up surpluses,” he said.
After years of planning, the convention authority put together the bulk of the deal last March after the city agreed to support the deal by offering some of its parking meter revenue and the 10% bed tax collected at the new hotel only, and the county agreed to an annual appropriation pledge for the full debt-service amount.
“We needed the city or the county to step up and provide the credit support,” Jennison said. “They both did their part.”
The soft economy in some ways will benefit the project, he added.
“In some ways it’s the best time to be building a hotel because everything is cheap,” Jennison said. “And hopefully by the time it’s opened, the economy will have improved. We’re hopeful that we’ll hit the market right, but we’ve got enough conservatism built into things that we’ll still be able to operate successfully” even if the economy remains soft.
Debt service will be paid from hotel revenues as well as from revenue from the hotel’s bed tax.
The authority expects an occupancy rate of around 70% at the new hotel within four years of opening, though it will only need to see a roughly 58% occupancy rate in order to make debt payments, Jennison said. The agency expects annual debt service coverage of 1.5 times based on revenues.
If hotel and bed-tax revenues are not sufficient to make payments, the convention authority would draw on a rental reserve fund of roughly $8 million, which would be replenished first by land lease revenue from the authority and then from parking meter revenue from the city.
If that revenue is not enough, Franklin County has pledged to appropriate annually the debt service amount. A debt service reserve fund consisting of six months worth of principal and interest payments, financed with proceeds from today’s sale, will provide additional security.
The layers of security are intended to provide comfort for investors who might be wary of the struggling hotel-convention center sector as many projects rely on economically sensitive, tourism-related taxes for repayment.
In St. Louis, for example, bondholders took ownership of two convention center hotels last year after the obligated group defaulted on the project bonds. In Chicago, the Metropolitan Pier and Exposition Authority this month asked Illinois to allow it to restructure its debt and extend a debt-service subsidy to deal with sagging tourism revenue. The state provides a sales tax backup and the authority has been forced to tap it due to declining tax revenue.
“All you need to do is look at MetPier to see why investors would be concerned about this kind of thing,” said Patrick Morrissey, director of fixed income at Wayne Hummer Asset Management in Chicago. “Costs are going up and there’s a clear desire for people putting on conventions to do it on the cheap.”
Franklin County’s pledge and fiscal position will be a key to the deal for investors, Morrissey added. “You need those added layers of protection, and you also have to keep your eye on if there’s money from the appropriation pledge,” he said.
Ahead of the deal, Moody’s Investors Service rated the bonds Aa2 and Standard & Poor’s rated them AA.
Moody’s warned that it’s likely the Convention Facilities Authority will need to tap the county’s pledge at some point over the life of the 30-year bonds.
“The strength of the ultimate appropriation pledge of the county is an absolutely critical component of credit quality, due to the project risk associated with the first pledged revenues: net operating income of the hotel being financed and room taxes limited only to those generated by the hotel,” analyst Rachel Cortez wrote.
“Moody’s believes that project risk associated with the construction and the potential for variance between projected and actual project revenues could require the county to appropriate alternate revenues for debt service at some point during the life of the bonds.”
The borrowing comes several months after the authority issued $40 million of new-money debt to renovate sections of the convention center, which was originally built in 1980 and underwent large renovations in 1993 and 2001.
“That’s it for now,” Jennison said of any future borrowings. “But if the hotel is successful, then we could have future convention center expansions.”