Illinois’ rating upswing is rippling down to two Chicago-area borrowers hard hit by the pandemic as they prep debt restructurings to smooth out fiscal damage from the pandemic.
The Metropolitan Pier and Exposition Authority, which manages Chicago’s convention center campus, expects to price an $832 million forward delivery refunding Thursday to current refund 2002 and 2012 bonds and pay off an unrated $148 million taxable scoop-and-toss taxable private placement.
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The Illinois Sports Facilities Authority plans to sell as soon as next week $19 million of bonds to scoop-and-toss fiscal 2021 debt service – action that frees Chicago from the burden of covering a pandemic-induced shortfall in local hotel taxes that repay its debt. The deal
This month, both Moody's Investors Service and S&P Global Ratings upgraded Illinois a notch, to Baa2 and BBB respectively. Fitch Ratings in June lifted its outlook on the state's BBB-minus rating to positive from negative.
That brought linked upgrades and outlook improvements to the two state-linked borrowers. They also benefit from a recovering economy that will help bolster tourist- and consumer-related taxes pledged to bond repayment.
Secondary market trading spreads have narrowed for Illinois state paper and state-linked borrowers, but the MPEA and ISFA will be the first to capture that upswing in the primary market.
“They are ultimately creations in some form of the state who draw security and lender interest because of the state so whether or not their credit went up, they are going to be positively impacted by the state upgrades because their own finances and their own payment of debt is now more stable,” said Matt Fabian, managing partner at Municipal Market Analytics.
“The main message from the upgrades is that the state is less likely to be downgraded to junk, so there a halo effect,” Fabian said.
“We have placed a market outperform rating on Met Pier bonds, and we reiterate our market outperform rating on the state of Illinois GOs,” John Ceffalio, senior municipal research analyst at CreditSights Inc. wrote in a report about the coming deal. "We expect (depending on deal pricing) there is still room for both issuers to continue to tighten and outperform the broader market, but we caution that the amount of compression that has already taken place leaves only a little room for further tightening."
MPEA
Fitch lifted MPEA's outlook to positive from negative by Fitch, affirming its BB-plus rating in a July 1 report on the upcoming deal. That kept the rating one notch below the state's.
S&P upgraded MPEA to BBB-plus with a stable outlook, citing its upgrade of Illinois. Kroll Bond Rating Agency is assigning a first-time rating of AA-minus with a stable outlook. The agency has $3 billion of debt.
MPEA isn’t pushing out final maturities on the debt and the final payoff on the portfolio remains 2057 but the majority of bonds being refinanced are back-loaded as term bonds with $197 million maturing in 2042, $160 million in 2047, and $314 million in 2052.
Goldman Sachs and Citigroup are co-joint bookrunning senior managers on the tax-exempt paper.
The authority repays its debt with taxes on restaurants, hotels, auto rental, and airport taxi departures, all of which plummeted as the economy shut down last year. A backup pledge of the state’s 6.25% sales tax after the state’s own Build Illinois bonds are paid bolsters the security scheme.
The authority suffered a shortfall in fiscal 2022 that required a $10 million draw on state sales taxes which must be repaid — a first since the Great Recession — but the restructuring allows the agency to avoid a fiscal 2022 draw.
The Illinois state sales tax is expected to generate $10.4 billion in fiscal 2022 of which $262 million is committed to Build Illinois debt so there’s strong coverage. The maximum statutory amount of state sales tax deposits that could be transferred into the expansion project fund is $300 million in fiscal 2021 escalating to $450 million in fiscal 2036.
“Based on recent authority tax performance, KBRA views sales tax support as the crucial factor in the rating assignment,” Kroll said. “Expansive state-wide sales tax base provides extraordinary coverage of over 19 times maximum permissible debt service.”
The offering statement lays bare the pandemic’s devastating blows to authority taxes. From 2011 to 2020 the tourism-related taxes averaged 4.2% of annual growth until fiscal 2021 when they plummeted 69% to $47.6 million in fiscal 2020.
The tax wallop came as operations shut down. The authority saw 233 events canceled since March 2020 losing out on 3.4 million attendees that would have generated 441,000 hotel stays and $275 million in operational revenue. With capacity limits now lifted, business has resumed and 317 events have been booked.
Fitch caps MPEA’s rating at one notch below the state’s rating of BBB-minus due to the appropriation needed to free up funds for debt service.
Fitch calls the restructuring “a reasonable approach to managing the sharp revenue declines.” An escalating debt service schedule drove past restructurings and another is expected in fiscal 2022 and in future years to align tax projections with debt service.
S&P's rating is based on its priority lien tax revenue debt criteria, which takes into account both the agency’s fiscal profile and the sponsoring government's and is capped at one notch above the sponsor.
Along with the upgrade of the state, Moody’s raised MPEA’s rating one notch, bringing it back into investment grade at Baa3 level with a stable outlook. It was not asked to rate the new MPEA bonds.
ISFA
The Illinois Sports Facilities Authority moved quickly to push off debt service to avoid forcing the city government to cover a shortfall by privately placing a nearly $30 million issue with RBC with the intention of then conducting a public offering.
The ISFA has about $415 million of outstanding debt mostly tied to the 2003 expansion of the Chicago Park District-owned Soldier Field where the National Football League’s Chicago Bears play.
Much of the debt issued for the authority-owned Guaranteed Rate Field that is home to Major League Baseball’s Chicago White Sox has been retired.
Fitch and S&P Global Ratings last week both revised their sports authority outlooks to positive and affirmed speculative-grade BB-plus ratings.
Fitch’s rating is capped at one notch below the state's because a state appropriation is needed to authorize the transfer of pledged state hotel tax revenues to the bond trustee.
S&P raised the outlook to positive from stable last week after lifting it to stable from negative in May.
“The positive outlook reflects both the state general obligation rating and ISFA management's fiscal 2022 request of a chairman's certificate sufficient to cover debt service state COVID-19 social distancing restrictions being lifted and reduced, but stable, reserve levels,” S&P said. The rating, like MPEA's, is capped at one notch above the state.
The “chairman’s certificate” represents the authority’s request to the state for an “advance” on state hotel taxes to cover debt service and operations. The authority then repays that advance with its own tax collections and a city subsidy of $5 million and state subsidy of $5 million.
Last year, the agency sought a lower amount than what was needed with plans to tap reserves to avoid hitting up the city but tax collections further faltered and a shortfall remained resulting in the debt restructuring plans.
About $79 million was collected from 5% of the state’s 6% hotel tax that can be tapped for bond repayment, down $209 million from 2020. About 60% is available as a backup to repay bonds. The tax is rebounding with April, May and June reported collections up 17%, 100%, and 268% over last year, respectively. The state projects $104 million of collections in fiscal 2022 of which $62.5 million is available for the authority’s $45.4 million debt payment.
Fitch considers fiscal 2022 projections achievable given the city and state reopening and the resumption of conventions and trade shows that are big driver of hotel stays.
While the restructuring takes the city off the hook for the current shortfall, Mayor Lori Lightfoot’s administration would like a long-term fix as debt service ramps up. The agency owes $46.5 million in debt service for fiscal 2021, $49 million in 2022, $59 million in 2027, $81 million in 2031, and $87 million in 2032 when all debt is retired.
The authority will now repay the restructured debt service between 2030 and 2032, adding about $468,000 in present value costs to the debt.
