Yield and structure help Lombard, Illinois, find GO buyers

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CHICAGO -- Four buyers purchased a Chicago suburb’s $3.9 million of unrated general obligation bonds Thursday, four years after Lombard, Illinois, lost its investment grade rating for reneging on its pledge to support bonds sold for a hotel and conference center.

The deal -- designed to begin the village's efforts to rebuild its bond market relationship -- lured buyers with its strong structural features including a lockbox on a backup pledge of sales taxes, but the market’s acceptance came with a steep penalty as yields landed more than 200 basis points over the Municipal Market Data’s AAA benchmark.

The bonds went out only to 2024 with the yield on the final maturity landing at 4.35%, 208 bp over the AAA and 133 bp over the BBB. The 2022 bond landed at a 4% yield, 192 bp over the AAA and 126 bp over the BBB. Most of the deal offered 5% coupons with the earliest maturity offering a 4% coupon.

The bonds carry a true interest cost of 4.72%

“We are pleased we were able to enter the market and we were pleased that there were multiple parties interested,” said village manager Scott Niehaus. “The village board understood there would be a price for us to enter the market again.”

The village board signed off on the pricing results at a meeting Thursday evening.

Village officials put the cost of the deal at $200,000 over what it would have paid at the double-A level rating it held in 2012 before its rating began to slide over its failure to honor obligations on a portion of debt for the $190 million 2005 issue sold through its Lombard Public Facilities Corp.

Robert W. Baird & Co. Inc. was the underwriter. Speer Financial Inc. was the advisor. Proceeds will finance waterworks and sewerage system improvements.

The village opted for a public offering over a private placement or state revolving fund loan and structured the deal with extra layers of protection as a means to begin rebuilding its market relationship.

Lombard issued GO-alternate revenue source bonds with sales taxes and water and sewer system fees also pledged to repayment. Non-home rule sales taxes will flow directly from local and state collectors to the trustee.

Village officials declined to discuss their rating goals, but finance director Tim Sexton said the village board adopted earlier this summer a revised debt management policy with stricter review policies similar to what Moberly, Missouri, did.

S&P Global Ratings restored Moberly to investment grade in April, seven years after cutting it to junk for reneging on an appropriation pledge on debt sold for an artificial sweetener plant. Analysts cited the city’s ongoing payment of its own debt and revised debt policies. They have previously warned Lombard that it faces a long road back to investment grade territory after such a default.

S&P in 2012 dropped the village six notches to BBB from AA for failing to make up a debt service shortfall on a portion of the bonds for the struggling project instead allowing for bond reserves to be tapped. It dropped Lombard to speculative-grade B in February 2014, when the village reneged on its appropriation pledge causing a payment default.

After years of failed negotiations and restructuring efforts, village and corporation officials struck a deal with key bondholders and the insurer on a portion of the bonds with bondholders taking a haircut. They sought the bankruptcy’s court’s blessing in a July 2017 Chapter 11 filing that was completed in March.

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Primary bond market Unrated bonds Sell side Illinois