CHICAGO – The Lombard, Ill., Public Facilities Corp. aims to complete its restructuring of its original $190 million of hotel and conference debt as soon as next month after a bondholder-led effort to kick the agency out of Chapter 11 was dropped.

A status hearing is set for Feb. 20 during which the final vote on the confirmation plan will be presented. The LPFC “may be ready to seek” an order for a March 6 confirmation hearing, LPFC’s attorney Brad Berish, of Adelman & Gettleman Ltd. told U.S. Bankruptcy Court Judge Jacqueline Cox last week.

The Chapter 11 case was launched in July after years of defaults and failed negotiations. It came after ACA Financial Guaranty Corp., which insures a portion of the bonds and is also a holder and controlling party, along with several key investors agreed to terms for a restructuring. The agreement calls for a bond exchange that stretches out bond repayment for decades and leaves some bondholders with a near total loss.

The Chapter 11 filing survived bondholder Lord Abbett Municipal Income Fund Inc.’s motion to dismiss the case, after Cox in December rejected arguments that the agency is a governmental unit that is too closely linked to its village sponsor – Lombard – to be eligible for Chapter 11.

Westin Hotel, Lombard, Illinois, financed with Lombard Public Facilities Corp. bonds
The public owner of the Westin hotel and conference center in suburban Chicago is closing in on an end to its Chapter 11 restructuring.

The village established the LPFC to oversee construction and operation of the Westin Lombard Yorktown Center, a hotel and conference venue located west of Chicago that has failed to live up to initial revenue projections prompting defaults on the 2005 bonds.

Lord Abbett then appealed to the U.S. District Court for the Northern District of Illinois Eastern Division, throwing a wrench in the LPFC’s effort to quickly resolve its case. The appeal was dropped, with the courts approving an order on Feb. 1.

“Their bonds have been purchased by a bondholder that supports the plan,” Berish told the judge last week.

No additional details were disclosed on the sale or buyer. Nuveen Asset Management and Oppenheimer Rochester High Yield Municipal Fund are major holders who support the reorganization. The $8.5 million of bonds were purchased for 39 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA website.

Berish also told the court that the LPFC has resolved a challenge from the project’s asset manager, Mid-America Hotel Partners LLC, which is a major holder of the original $29 million of C bonds that would be wiped out in the restructuring. The debt is subordinate to the A and B series in the deal, and the original indenture requires that A and B holders be made whole before C holders recoup their investment.

Under the settlement, the asset manager would recoup crumbs in the form of $35,000 per year over 15 years and a $200,000 payment to cover attorney fees. ACA will provide a loan to cover the latter payment.

Though several other creditor claims have been resolved, a remaining obstacle is an objection filed by the U.S. Trustee participating in the case.

“U.S. Trustee objects to confirmation of the plan because the third party release and exculpation provisions are overly broad and contrary to the standards set forth by the Seventh Circuit. Additionally, the plan improperly binds creditors that abstained from voting on the plan to the third party release. Therefore, the Plan should not be confirmed,” reads Kimberly Bacher’s filing on behalf of U.S. Trustee Patrick Layng in a Feb. 7 filing.

Barish told the judge talks were expected over the next week in an attempt to resolve the Trustee dispute, with an update expected at the Feb. 20 hearing. The original bankruptcy filing had projected an exit date by the end of 2017.

Under the confirmation plan, the LPFC would conduct a bond exchange for its 2005 issue. The Wisconsin-based Public Finance Authority would serve as issuer, according to court filings.

The reorganization calls for A-1 series holders who have a $71 million claim to exchange their bonds for a $33.1 million series with final maturity in 2056, and $21.63 million subordinate issue that matures in 2067. A-2 ACA-backed holders hold a $58 million claim and will receive $26.9 million in new bonds with a 2056 final maturity and a subordinate series for $17.58 with a final maturity in 2067. B holders have a $48 million claim and will receive $19.4 million of new bonds with a 2051 final maturity and $22.45 million of subordinate bonds that mature in 2067.

The new indenture lists the senior maturity dates but not the subordinate which come from past court filings. The A-2 bondholders that carry ACA insurance received commutation offer from ACA that allows them to opt out of the plan.

The original deal totaled nearly $200 million in multiple series with $64 million of A-1 bonds, $54 million of A-2 bonds, $43 million of B bonds. A deeply subordinated C series for $29 million was also sold but subsequent issues raised the total of C bonds to $72 million, according to court filings.

The entire C series is being canceled.

The village will pay $3 million to the LPFC on the effective date of the plan to fund capital expenditures and will continue to contribute revenue -- from a special 1% so-called Places for Eating Tax enacted last year -- through 2021 to LPFC for repayment on a portion of the bonds.

The village also agrees to establish a tax-increment finance district and enter into a TIF Redevelopment Agreement with the LPFC, which provides for the payment of up to $3.7 million to the LPFC.

The restructuring would give the LPFC more time to repay its debts, better realigning projected revenues with debt repayment. It would also free the village of its appropriation obligations on portions of the debt. Its decision to renege on the pledge cost the affluent village its investment grade status.

The Lombard project suffered from a drop in tourism and meeting business during the recession and never got up to speed to meet debt service.

The Chicago suburb since January 2014 has reneged on its pledge to cover revenue shortfalls needed to avoid defaults on a portion of the bonds after its officials took the position that village taxpayers were not legally required to do so.

The LPFC, village officials, ACA, and other key bondholders have been at the negotiating table for years as the project faltered and reserves were drained.

ACA last summer acted on its post-default rights as the controlling party and directed the trustee Amalgamated Bank of Chicago to accelerate bond repayment. The move was viewed by some sources familiar with negotiations as an effort to sway some holdouts in negotiations.

The affluent community of 43,000 west of Chicago lost its double-A rating from S&P Global Ratings after it reneged on its appropriation pledge attached to the B series. The A series carries an indirect appropriation pledge from a village rebate agreement.

The facility includes a 500-room hotel, two restaurants, 39,000 square feet of meeting and convention space, a 25-meter indoor swimming pool and fitness center, and a 675-car, four-story parking deck.

Some existing B bonds traded last year at around 22 cents on the dollar. The insured A bonds have recently traded in the 90 cents on the dollar range and the uninsured A bonds traded in 2016 at 24 cents on the dollar, according to trade data on EMMA.

Filings warn that foreclosure is a poor option and would likely result in a recovery of “one-third of the outstanding balance of the A bonds, with no remaining funds available for any other bonds.” The restructuring is likely to provide “a far superior return for holders of the bonds and other parties.”

The move by the Chapter 11 backers to end the Lord Abbett Chapter 11 challenge prevents an appellate court discussion that would have added to limited body of decisions on Chapter 11 eligibility with the Las Vegas Monorail Co. case being the most high profile.

“Only a small number of cases have addressed the eligibility of quasi-governmental entities for bankruptcy protection under Chapter 11 of the Bankruptcy Code,” Chapman and Cutler LLP wrote in a report on the bankruptcy court decision.

“This addition to the case law canon confirms that such eligibility analyses are intensely fact-specific inquiries. Thus, practitioners should seek advice regarding bankruptcy eligibility before any transaction closes to properly assess any bankruptcy risk,” it continued.

While the legislative history of the bankruptcy code suggests that courts should interpret the definition of governmental unit broadly, Cox concluded the definition should not be interpreted so broadly as to encompass an entity not actually carrying out some governmental function, the Chapman and Cutler report found.

Chapter 9 municipal bankruptcy was not an option. The state lacks such a statute and the corporation would not meet the legal characteristics of a municipality that could take advantage of Chapter 9.

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