Revenues supporting San Antonio’s $173 million of Convention Center Hotel Finance Corp. bonds are expected to fall short of debt service on July 15.
The hotel debt's pandemic-driven troubles led Moody's Investors Service to revise the outlook to negative on the city's Aaa rating.
To cover the July payment, the city is expected to draw $1 million to $1.4 million from its debt service reserve, a scenario that prompted a May 21 downgrade of the underlying rating on the hotel bonds to Baa1 from A3 by Moody’s Investors Service. The bonds remain on review for another possible downgrade, Moody’s said. The outlook on San Antonio's issuer, general obligation limited tax, lease, and contract tax bond ratings were revised to negative from stable at the same time.
“The city has not indicated any additional or alternative source of funding for the hotel tax bonds,” Moody’s analyst Adebola Kushimo wrote.
In August, S&P Global Ratings downgraded the Series 2005 A and B hotel bonds to BBB-plus from A. The outlook remained negative. That followed use of hotel occupancy taxes to make up for a shortfall of hotel revenues in July.
The convention center hotel bonds, issued to build a Grand Hyatt connected to the city convention center, are insured by Ambac, also rated Baa1 by Moody's, per the MSRB’s Emma disclosure website.
Economic disruption during the pandemic halted tourism and related business activity, which drove a steep fall in pledged revenue, Moody’s said.
“As a result, the accumulated pledged revenue and reserve in the equity fund for the hotel special tax bonds were depleted and used to meet the July 15, 2020, obligation, reducing the flexibility for future payments,” Kushimo wrote.
The special tax bonds are payable from hotel revenues, a 7% hotel occupancy tax derived from the hotel and a 2% citywide hotel occupancy tax.
Before the pandemic, debt service obligations were met by the hotel, and no city pledged HOT revenues had been used for debt service.
With the impact of COVID-19, a portion of the city’s pledged HOT revenues were used to make up a shortfall on the debt service payment for the first time on July 15, 2020. About $338,000 of HOT revenue were applied toward the hotel’s $8.9 million July 2020 debt service payment.
“The negative outlook on the issuer, GOLT, lease and contract tax bond ratings signals a lack of proactive and effective oversight by the city over the hotel tax bonds that, should it persist, may be inconsistent with the Aaa issuer rating,” Kushimo wrote.
