Bonds

Chicago convention agency bringing scoop and toss, first bond tender

The agency that manages Chicago’s convention center campus wades into the market this week with a deal that continues its trend of pushing off looming bond payments to manage a persistent mismatch between its revenues and its debt service schedule.

The Metropolitan Pier and Exposition Authority of Illinois is set to price $56.2 million of expansion project refunding bonds Wednesday in a deal that will cover a Dec. 15 principal payment and capitalize interest on next June’s payment.

The transaction will be followed by an optional bond tender set for November or December totaling up to $270 million and structured to lower debt payments in fiscal 2025. If completed, it would mark MPEA’s inaugural tender offer.

“The dichotomy we’re in right now is while authority taxes have recovered and even exceeded pre-COVID tax collections by a little bit, growth was forecasted beyond that level,” said MetPier CFO Jason Bormann.

Metropolitan Pier and Exposition Authority of Illinois

MPEA is also considering a second private placement of project revenue bonds to finance improvements to its energy center following a $37 million placement in 2019. The debt would be placed with Morgan Stanley. The board is set to consider the ordinance as early as this month’s meeting Oct. 24.

Since the pandemic, MPEA, also known as MetPier, has turned to scoop-and-toss to ease debt payments and avoid repeated draws on the state sales tax that acts as the paper’s ultimate security.

Future restructurings are likely as the agency’s bevy of hospitality taxes are expected to fail to keep pace with an escalating debt schedule.

“As of right now, as we are re-emerging from COVID, I want to take a year-by-year focus because we don’t know what our authority tax collections are going to be,” MPEA CFO Jason Bormann said. “We’ve taken an approach to do this year by year at this point in time because we want to be thoughtful about the amount we are refinancing and only refinancing that which is necessary.”

MetPier operates manages Chicago’s convention center Regency McCormick Place — the largest convention facility in the U.S. — as well as entertainment district Navy Pier, the 10,000-seat Wintrust Arena, performing arts center Arie Crown Theater, and two large hotels.

Like all tourism- and hospitality-based facilities, MPEA was hit hard during COVID-19, which sparked massive drops in the taxes the agency uses first to pay debt service. Those include a 1% food and beverage tax levied in the Chicago central business area and at Chicago’s Midway and O’Hare International airports; a 2.5% hotel tax collected citywide; a 6% rental car tax collected throughout Cook County; and airport ground transportation departure taxes levied at the two airports.

After taking a beating from the pandemic, MPEA is “continuing to recover,” Bormann said. “We feel like our events are coming back strong and we continue to be optimistic about our future.”

For investors, the key to the MPEA credit is not authority taxes but the robust backup pledge: a first lien on the state’s 6.25% sales tax. The pledge is good for up to $300 million a year through fiscal 2026 and eventually increases to $450 million a year, subject to annual appropriation.

“The first thing you learn as an analyst is to ask ‘What’s the ultimate security?'” said Howard Cure, director of municipal bond research at Evercore Wealth Management, LLC, which holds a position in MetPier.

“That also makes it a faster, easier analysis rather than looking at all of the revenue sources with MetPier and then worrying about if there’s a resurgence of COVID what’s going to happen to them.”

The authority taxes are “somewhat irrelevant,” said Fitch analyst Eric Kim. “Our ratings is based entirely on the backstop provided by the state.”

MPEA last tapped the sales tax in fiscal 2021, with a $10 million draw that the agency has since repaid.

Like the Illinois Sports Financing Authority, the MPEA is reluctant to draw on the state sales tax, which it has to repay, and would rather cover its debt from authority taxes.

Cure said that debt management philosophy makes sense. “Scooping and tossing is never a great debt practice, but I understand it in this case,” he said. “Their preference is to be self-sufficient, which is why they are lengthening some of the debt costs.”

Authority taxes have enjoyed a strong rebound from pandemic-era drops, climbing to a high of $168.4 million in fiscal 2023, which ended on June 30, up more than 40% from the prior year and 6.3% ahead of fiscal 2019. But that’s still less than the debt service tab due in 2023.

The revenue-debt schedule mismatch is projected to continue through at least fiscal 2026. That’s despite an annual $31.7 million annual subsidy from the state through 2035.

“The first thing you learn as an analyst is to ask ‘What’s the ultimate security?,'” said Howard Cure, director of municipal bond research at Evercore Wealth Management, LLC.

Authority tax collections are projected to total $173 million in fiscal 2024, with debt service totaling around $213 million after the restructuring.

In 2025, revenues are expected at $182 million and debt service around $262 million. Debt payments will grow significantly in 2028 and 2029 as the “toss” part of the scoop-and-toss kicks in.

“The dichotomy we’re in right now is while authority taxes have recovered and even exceeded pre-COVID tax collections by a little bit, growth was [originally] forecasted beyond that level,” Bormann said. “So we’re still in this environment where we’re exceeding pre-COVID levels but not at the point we thought we were going to be in fiscal 2024 before COVID happened.”

S&P Global Ratings rates the expansion bonds A with a stable outlook, which is higher than its A-minus rating on state of Illinois general obligation bonds, which also carry a stable outlook.

That may make the bonds a bit rich compared to the state’s own GO paper, Cure said.

“The question I’m going to have is how is this paper going to price compared to the state?” Cure said. “If the state is cheaper, then why not just buy the state paper?”

S&P analyst Geoffrey Buswick said S&P rates MetPier using its “priority lien” criteria, linking it to the state. That “allows rating uplift above the obligor’s creditworthiness,” Buswick said.

Like S&P, Fitch and Kroll Bond Rating Agency rely on the state sales tax as the chief credit support. Unlike S&P, Fitch rates MetPier below the state’s GO rating, in light of the appropriation pledge risk on the sales tax.

“That’s based on the experience not that many years ago where under the prior governor the state did not include the appropriation for the debt service,” said Fitch’s Kim. “That was resolved very quickly but it made clear to us there is a risk and we should acknowledge that.”

Fitch pegs the bonds at BBB with a positive outlook. It rates Illinois BBB-plus and lifted its outlook to positive in March.

Kroll rates the debt AA-minus with a stable outlook, noting that the state sales tax provides coverage of 38.4 times at the current state sales tax maximum and 25.6 times at the escalated $450 million level. Kroll rates the state’s Build Illinois sales tax revenue bonds AA-plus with a stable outlook.

Citigroup is senior manager on this week’s deal with Cabrera Capital Markets LLC, Loop Capital Markets, Siebert Williams Shank & Co. LLC and AmeriVet Securities rounding out the syndicate. Katten Muchin Rosenman LLP is bound counsel. PFM Financial Advisors LLC is financial advisor.

Citigroup and Cabrera will be co-dealer managers in connection with the tender offering.

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