The Metropolitan Pier and Exposition Authority (MetPier) this month privately placed USD 36.8m of bonds backed by a new credit with Morgan Stanley, with a second deal in the works, according to Jason Bormann, MetPier’s director of treasury and capital management.
It’s the first time MetPier in Chicago has borrowed from its net operating revenues base, and the move allows the authority to avoid both the ratings agencies and the Illinois General Assembly.
The revenues backing the new credit are separate from the revenues backing MetPier’s main bond indenture, commonly called its expansion bonds, which are backed by taxes and a portion of the State of Illinois’ sales tax.
“None of the revenues cross,” Bormann said. “And that’s by design. Our expansion project indenture has been used to pay for the expansion project and the tax revenues support that; we can’t even use the taxes to support operations of the authority. We think of them as two different silos.”
The private placement with Morgan Stanley closed on 8 May. MetPier’s total interest cost was 4.46%. Morgan Stanley is expected to hold the bonds, though it is allowed to sell them if it wants, Bormann said. Katten Muchin Rosenman LLP is bond counsel and PFM is financial advisor.
MetPier, a municipal corporation created by the State of Illinois in 1989, owns Chicago’s convention center, McCormick Place, the Hyatt Regency McCormick Place, the Marriott Marquis Chicago, the 10,000-seat Wintrust Arena, associated parking garages and an entertainment and office district called Navy Pier.
The new credit, called the Project Revenue Bonds, will be used to finance an energy conservation project to replace 67,000 light bulbs in McCormick Place. The savings generated by switching to more efficient light bulbs is expected to cover debt service, which begins at USD 2.5m annually and rises to USD 4.3m, according to bond documents.
The bonds mature in 2041. They are limited revenue obligations payable from and secured by a lien on and security interest in a trust estate in annual project energy savings; the net revenues of the parking facilities; the net revenues of the energy center; and money in various subaccounts, such as a debt service and capitalized interest account.
The authority’s energy center and parking garages are two of its profitable enterprises, compared to the money-losing convention center, according to financial documents.
Revenues from the hotels are excluded.
MetPier won’t start paying on the bonds until 2021, when the project is expected to be complete, according to Bormann.
The company that the authority has hired for the project, Ameresco, Inc., has agreed under certain conditions to make up any shortfall in energy savings that is needed to cover annual debt service, Bormann said.
MetPier opted for the new, privately placed credit because the financing isn’t for a large capital project and is intended to be supported by operations, Bormann said.
“To do a financing supported by net operating revenue under our statute is really the most natural way to do it,” Bormann said. “That’s what drove us toward this structure.”
The authority plans to place another tranche before the end of the calendar year, Bormann said. The same finance team is likely, he said, declining to offer details on the size.
For holders of the authority’s expansion bonds, the question is one of encroachment.
“You always worry about if it dilutes your existing credit somehow,” said Howard Cure, municipal bond research director for Evercore Wealth Management LLC, which owns some MetPier expansion bonds. “My first question would be if they’re going to be peeling off some of the revenues to pay for the new debt.”
Backloaded, zero coupons
MetPier’s expansion bonds are payable from four taxes: a 1% tax on restaurant sales in a downtown Chicago district, a 2.5% tax on hotel and motel rooms in Chicago, a 6% tax on car rentals in Cook County, and an airport departure tax at O’Hare and Midway airports.
A portion of the State of Illinois sales tax is also available to pay the bonds if the taxes fall short, which they have several times, according to financial documents. MetPier restructured its debt starting in 2010 to push out debt payments and lower annual debt service costs, but before that, the state needed to provide backup revenue to cover shortfalls. The authority will repay the state an outstanding USD 39.3m in FY19, according to the financial statements.
As a result of the restructuring and its use of capital appreciation bonds (CABs), also known as zero coupon bonds, MetPier has a heavily back-loaded and long-dated debt schedule, with a final maturity of 2057, according to financial statements.
MetPier has USD 4.1bn of outstanding expansion bonds, as well as unamortized accretion on the CABs of USD 5.7bn, according to its financial statements.
The schedule and use of zero-coupon bonds give the credit a “Puerto Rico COFINA feel,” says a buyside analyst whose firm does not hold MetPier bonds.
“They issued mostly zero bonds and for very long [maturities], and it has a very COFINA like feel to it,” the analyst said. “[The CABs] severely underrepresents the debt,” the analyst said, noting that the debt load rises annually even without fresh borrowing due to the CAB interest.
“Every year they’ve run an operating deficit,” the analyst said. “It’s not that different from every other convention center in the country, but this goes back a long way.”
MetPier collected USD 151.5m of taxes in FY18, according to its financial statements. Debt service on the expansion bonds totaled USD 110m in FY18, but that doesn’t include USD 126m of accretion on the authority’s capital appreciation bonds. Including that figure, debt service in FY18 totaled USD 237m, according to financial statements.
Proposing new borrowing
This week the Illinois Senate passed a controversial and last-minute bill that would expand the district in which the 1% restaurant tax is collected to generate roughly an additional USD 10m a year, MetPier CEO Lori Healey testified to lawmakers this week. Senate Bill 485 would pave the way for a USD 600m expansion and boost MetPier’s borrowing ability to USD 3.45bn.
The bill appeared headed for the House, but today (30 May) Chicago Mayor Lori Lightfoot (D) came out against the bill, rendering its future uncertain. The General Assembly is scheduled to adjourn by midnight on 31 May, and lawmakers still have to pass a FY20 budget.
MetPier lost its prized AAA rating from S&P Global Ratings in 2015 when Illinois missed a monthly set aside payment due to an impasse of the state budget. The state since passed an amendment that allows for the automatic transfer of the funds.
S&P Global Ratings Agency upgraded its rating on the authority’s expansion bonds to BBB on November 2018. Fitch Ratings rates the expansion bonds BBB- and Moody’s rates the bonds Ba1.
A USD 59.3m tranche of MetPier Capital Appreciation Refunding bonds Series 2017B with a 0% coupon until maturity at 2056 sold for 22 to yield 4.1% in round lot trading on 21 May, according to Electronic Municipal Market Access.
by Caitlin Devitt in Chicago