Coronavirus sends Illinois hotel project to new bond default

A suburban Chicago hotel and conference center that restructured its bonds through bankruptcy in 2018 defaulted on debt service owed this month.

The breathing room the Lombard Public Facilities Corp. won in the Chapter 11 restructuring was nowhere near enough to outrun the coronavirus pandemic, which shuttered the Westin Lombard Yorktown Center.

The restructuring – agreed to by a majority of bondholders accepted in 2018 was supposed to better match expected revenue with the debt structure. The $142 million bond exchange resulted in recovery rates between 77% and 86% on three most senior series while a subordinated $29 million series took a near total loss. The debt was pushed out to a 50-year repayment term.

The corporation, established by Lombard to own and issue debt for the hotel project, dipped into reserves to fully cover a July 2019 debt service payment but operations were producing revenue that officials hoped would cover debt service.

Those plans were thrown into disarray by COVID-19. The hotel was temporarily shut down and remains shuttered with reservations not being accepted until Aug. 3, according to a hotel operators.

It was closed March 29 when Gov. J.B. Pritzker shuttered restaurants and bars and banned large gatherings. Restaurants and bars have since been allowed to reopen at limited capacity but large conferences are still banned.

“A portion of the principal and interest due and owing went unpaid for the July 1, 2020, debt service payment” and as result trustee UMB Bank NA issued a notice of default under the indenture, the LPFC said in a notice published on the Municipal Securities Rulemaking Board’s EMMA site earlier this month.

The payment default triggers events of default under the indenture and a loan default under the loan agreement and in turn a default under the mortgage. “The trustee reserves all rights to exercise its remedies at law and as set forth in the indenture, the loan agreement, or other bond documents,” UMB writes in a notice attached to the filing.

A lawyer for the LPFC did not return a call seeking comment on the default. A 2036 bond in the A series traded this week at 91 cents to 92 cents on the dollar.

The hotel and its restaurants generated $5.47 million in revenue for the first quarter, down $588,000 from the first quarter of 2019 “due to the negative impact of the coronavirus and related governmental mandates,” according to first quarter results posted in May. The project suffered a $200,000 loss in net operating income compared to a $468,000 gain in 2019.

The project held at the end of the first quarter about $5.3 million — before a $512,000 draw to subsidize operations made in May — in balances in various funds which can be used for operations, debt service, and capital. That’s down from $8.2 million at the close of 2019.

The LPFC sold $142 million of tax-exempt bonds in 2018 through the Wisconsin-based Public Finance Authority in exchange for the original $190 million 2005 issue.

The exchanges were aimed at buying the project some time for its revenues to cover rising debt service demands after the 2008 recession cut deeply into revenue projections.

The indenture on the 2018 restructuring bonds permits hotel operating expenses to be covered by revenue held in the senior hotel capital expenditure reserve fund with the consent of various parties. The project made a slight $44,000 draw to cover the $500,000 July 2019 payment on four of the six series of bonds that make up the restructured bonds.

Project revenues appeared to cover the January 2020 payment as no notice of reserve use was posted. A required quarterly update published this year concluded that as of January 30 “no event of default under the Indenture has occurred and is continuing.”

Lombard established the corporation to issue the original 2005 bonds and manage plans for the Westin with village support through a tax rebate agreement and its appropriation pledge. The village, which once carried the AA rating of S&P Global Ratings, lost its investment grade rating after reneging on the pledge.

After years of failed negotiations, the village and corporation struck a deal with key bondholders and the insurer on a portion of the bonds and sought the bankruptcy’s court’s blessing in the Chapter 11 case filed in July 2017. The village’s appropriation pledge is no longer attached.

As part of the reorganization, the village board approved a restructuring agreement that provided $3 million for facility improvements and up to a total of $3.7 million in tax-increment financing support in the coming years for site infrastructure improvements.

Though the village also continues to contribute revenue from a special 1% so-called Places for Eating Tax enacted last year through 2021 and a tax rebate of about $1 million remains in place, it’s no longer obligated to repay the bonds. The restructuring contains various legal releases for the village, significantly reducing its legal liability.

The reorganization received overwhelming to unanimous approval in a balloting process.

Major bondholders included Nuveen Asset Management, Oppenheimer Rochester High Yield Municipal Fund, and ACA Financial Guaranty, insurer on a portion of the bonds and a holder and controlling party based on the original bond indenture.

The board that endorsed the hotel project believed demand existed, that it would spur economic development, and that it was worth the risk to the village. The facility has 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.