Bonds

New year, new default for a troubled suburban Chicago hotel

A suburban Chicago hotel and conference center’s COVID-induced struggles led to a fresh default on its restructured bonds this month.

Breathing room still remains for the Westin Chicago Lombard debt from a bondholder-provided loan that is helping manage the pandemic’s toll on operations and continue renovations designed to enhance its appeal.

Defaults occurred in mid-2020 and last year and again with the January 1 payment. No debt service payments were made on the first tier A1 and A2 and B bonds and the $4.5 million loan from a group of “Funding Bondholders” who own a majority of principal now takes repayment precedent over the first tier bonds.

January 1 brought another default on bonds that financed the Westin Chicago Lombard in Lombard, Illinois.

Marriott/Westin

The restructuring a majority of bondholders accepted in 2018 through Chapter 11 bankruptcy was supposed to better match revenue prospects with the timing of debt payments but COVID-19 blew those assumptions out of the water.

The Lombard Public Facilities Corp. issued the original debt in 2005 to finance construction of the then Westin Lombard Yorktown Center but the 2008 recession knocked repayment plans off course and the project landed in Chapter 11. 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 time for its revenues to cover rising debt service demands after the 2008 recession cut deeply into revenue projections.

When the COVID-19 pandemic struck, Illinois Gov. J.B. Pritzker ordered a statewide shutdown under a stay-at-home order that shuttered the Lombard hotel, restaurant, and conference center operations, and defaults on the restructured bonds followed.

Under the bondholder funding agreement entered into with the trustee last year, the facility received a $4.5 million lifeline.

“Based on current cash projections it did not appear that the borrower will have sufficient funds to fund all hotel operating expenses and other costs associated with operating and maintaining the project” upgrades and trustee expenses, reads bondholder notices from trustee UMB Bank NA.

The $4.5 million cushion enjoys priority over the first tier series A bond repayment. The loan carries a 7.5% interest rate and matures Dec. 31, 2023, with payments due quarterly beginning at the end of 2022. “No payments will be made to any bondholder in respect of its bonds until the trustee repays the Term Loan in full to the Funding Bondholders,” according to the agreement’s terms.

“Total Net Revenues will be utilized to fund the balance of the” project improvements and “to repay the Term Loan before Debt Service recommences” as it takes priority over the A bonds, reads the Lombard Public Facilities Corporation 2022 Master Operating Plan and Budget posed Thursday on the Municipal Securities Rulemaking Board’s EMMA website.

The restaurants resumed operations July 29, 2020, while the hotel reopened on Sept. 3, 2020.

“Revenues remained depressed due to reduced travel demand and loss of airline crew rooms,” according to a third quarter 2021 update posted late last year.

Net operating income before debt service showed a positive balance of $4 million through the third quarter but that reflected infusion of cash from the $4.5 million loan. The project closed out 2021 with a $4.9 million cash balance.

Some renovations were delayed due to the pandemic’s supply chain impact on materials. Lobby and ballroom renovations are being completed while meeting room upgrades will follow this summer and are expected to be wrapped up in late 2022.

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. Draws were made to help cover the 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 and no events of defaults under the indenture were reported.

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 the $3.7 million TIF support for site infrastructure improvements.

Though the village of about 44,000 west of Chicago also continued to contribute revenue from a special 1% so-called Places for Eating Tax and a tax rebate it’s no longer obligated to repay the bonds. The restructuring contained 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 $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 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.

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