CHICAGO — Cuyahoga County, Ohio, is bringing $231 million of certificates of participation to market this week to finance a Hilton hotel adjacent to Cleveland's new downtown convention center complex.
The Cleveland-Cuyahoga County Port Authority is conduit issuer on the deal. The port authority will own the hotel and the county will lease it through at least 2044. The debt is backed by the county's appropriation pledge and officials said they expect make payments with a combination of taxes and hotel revenue.
The reliance on hotel revenue for part of debt service and maintenance of the facility and the county's appropriation pledge carry risks, ratings analysts warned.
The pricing is set for Thursday.
The 32-floor, 600-room Hilton will feed into the new Cleveland Convention Center and a medical merchandise mart, which is now called the Global Center for Health and Innovation. The city and county have spent years building the convention center complex, and say it is key to building a local health care industry. The hotel is set to open in the summer of 2016.
"It's part of an ongoing series of redevelopments of our downtown," said Matt Carroll, chief of staff for county Executive Ed FitzGerald. "The convention hotel fills an important void that's lasted for some time," Carroll said, adding that all the city's competitors for convention shows have hotels.
"We really need a hotel," he said. "Our convention center was not functioning at a high level for a long time."
The financing is modeled a 1997 deal that financed another icon on the Cleveland landscape, said Tim Offtermatt, with Stifel Nicolaus & Co., Inc., the senior manager on the deal.
"The financing arrangements look almost exactly like the city of Cleveland's financing for the Browns stadium," Offtermatt said.
In this case, the local port authority will take ownership of the hotel to meet state law requirements, he said.
The county is paying for the hotel with a combination of the hotel net revenues, a 1% hotel tax, and revenue from a 0.25% temporary sales tax that was enacted in 2007 to help pay for the medical mart.
Cleveland, which has issued in $8 million in bonds for the hotel, has also agreed to dedicate tax increment financing revenues and its portion of a bed tax for debt service.
County officials estimate the revenue sources together will provide 1.1 times coverage of annual debt service on both the medical mart and the new COPs through 2027, according to Moody's Investors Service. The medical mart bonds, like the sales tax increase, expire in 2027.
Because the debt is made up of certificates of participation, the county is only obligated to make lease payments, which do not constitute a debt under state law and don't carry a pledge of the county's full faith and credit.
Moody's has assigned its Aa3 rating and stable outlook to the COPs, two notches below the county's Aa1 limited-tax general obligation rating. The two-notch difference reflects the risk of non-appropriation and the non-essential nature of the project, analysts said.
"We expect the county's twin objectives to maintain strong credit quality and spur economic development via the hotel project will provide sufficient incentive to appropriate lease payments through the life of the COPs," Moody's analyst Matthew Butler wrote in a ratings report on the deal.
"However, the non-essential nature of the hotel raises additional credit risk relative to lease-backed debt collateralized with fundamental municipal facilities and that risk is reflected in the second notch below the county's [limited-tax general obligation] rating," he wrote.
Standard & Poor's rates the debt AA-minus, one notch below its AA rating on the county's general obligation bonds.
Moody's notes that the COP financing relies on hotel revenues, which adds an element of risk. The portion of the hotel net revenue dedicated to debt service is capped at $8 million for the first three years and $9 million after that, and also covers future maintenance needs of the hotel, according to Moody's.
"Should net revenue fall below projections, the county could be exposed to maintenance needs of the hotel and, more importantly, may be forced to utilize general fund revenue to a greater extent than planned to repay the COPs," Moody's wrote.
If the county terminated the lease or stopped making payments, the trustee, US Bank NA, could take possession of the hotel, according to bond documents. But the trustee has no obligation to redeem the certificates in that case, and lease holders "might be left without an adequate remedy in such an event," bond documents say.
The preliminary bond documents also note the risk of non-appropriation by the county.
The lease requires the county's fiscal officer to include debt service in the annual budget requests to the County Council, but "there is no assurance that a county council will approve such budget appropriations," bond documents say.
Cuyahoga is home to Cleveland, and the area is considered the economic engine of northeast Ohio.
Despite Cleveland's struggles with population loss and tax depreciation — the city's base has suffered a valuation decline of 16% since 2007, according to Moody's — rating analysts praise the county for its strong financial position, management and liquidity.
The full project is expected to carry a price tag of around $290 million. Of that, roughly $230 million will come from COPs, with another $68 million from cash and $8 million from Cleveland's bond proceeds, according to preliminary bond documents. Hilton is kicking in $4.75 million.
The certificates mature from 2017 through 2034, with two term bonds, one maturing in 2038 and one in 2044.
Squire Sanders LLP is special counsel on the deal. In addition to senior manager Stifel, the underwriting team includes Keybanc Capital Markets, Wells Fargo Securities, The Huntington Investment Co., Fifth Third Securities Inc., and Loop Capital Markets.
Prism Municipal Advisors LLC is financial advisor.
