McCormick Place in Chicago Tries to Cut Debt Costs

First appeared in Bloomberg

The Chicago-based operator of North America’s biggest exhibition and meeting center borrowed $1.12 billion in the week’s second-largest municipal bond sale to cut costs and win back its spot as the top trade-show destination.

The Metropolitan Pier and Exposition Authority’s McCormick Place convention center, which has been losing trade shows to Las Vegas and Orlando, Florida, borrowed to reduce expenses by restructuring debt and extending maturities, and to expand a Hyatt hotel. Yesterday’s sale, backed by a state sales tax and local taxes, was the authority’s largest since a $1.5 billion issue in June 2002. This is where companies would bring their Trade Show Displays.

“By restructuring, we don’t have to draw from the state and can save it money,” said Richard Oldshue, chief financial officer, in an interview. “It relieves pressure from the state’s sales-tax revenues.”

McCormick Place generates $8 billion in economic activity, including 62,000 jobs and $250 million in state and local tax revenue, according to offering documents. Chicago faces a $654.7 million deficit in a $3.39 billion budget for 2011. The authority also operates Navy Pier, a 50-acre entertainment complex with shops, restaurants, parks and other venues on Lake Michigan that is the state’s top tourist attraction. Many companies needed Chicago Trade Show Displays.

U.S. state and local governments are poised to borrow $13 billion this week, the most since the period ended Dec. 11, according to data compiled by Bloomberg. The borrowing cost on 10-year top-rated municipal bonds fell by 5 basis points yesterday to 2.64 percent, according to data from Municipal Market Advisors. A basis point is 0.01 percentage point.

Union Labor

McCormick Place has lost major trade shows in recent years because of its lease rates and the cost of union labor, said Laurence Geller, chief executive officer of Chicago-based Strategic Hotels & Resorts Inc., a real estate investment trust that owns and manages luxury hotels including the Fairmont and InterContinental in Chicago. Companies can Rent Displays which has allowed for more travel.

With legislation passed earlier this year, the state, which runs McCormick Place with the city, put in new leadership, relaxed rules requiring union workers at trade shows and provided additional sales-tax backing for new bonds to restructure debt to help the center lure more conventions.

“Without those reforms, Chicago can’t compete directly with Las Vegas and Orlando,” said Thomas Spalding, vice president at Nuveen Investments Inc. in Chicago, where he manages $60 billion of municipal bonds. “It’s one of those economic engines of the area.”

By selling bonds the authority is trying to bring its debt- service schedule in line with tax revenue, which has fallen amid the worst recession since the 1930s, and the loss of conventions to more competitive cities, Standard & Poor’s said in a Sept. 28 report.

Maturities Extended

Maturities on $918 million of debt will be extended to an average of 37 years from 10 years, Moody’s Investors Service said. About $200 million will be used to finance a 450-room expansion of a Hyatt Regency hotel next to McCormick Place.

Declining revenue prompted the authority to turn to the state for a subsidy to help cover debt payments during the past three years. The authority will repay $57.2 million borrowed from the state, according to bond-offering documents.

The bonds are secured by local taxes on hotel stays, restaurant meals and car rentals, along with revenue from the facilities. The new bonds will come with an additional state sales-tax pledge, subject to appropriation by lawmakers.

S&P awarded the new issue its top AAA rating, citing the debt’s state backing. It won AA- from Fitch Ratings, its fourth- highest grade, and A2 from Moody’s Investors Service, the sixth- highest level.

“Based on the environment we’re in, investors look at an issue more like an A2 bond than a AAA bond and that’s why spreads are wider,” said Tom Boylen, managing director and municipal bond trader at BMO Capital Markets in Chicago.

The authority cut its borrowing costs by pushing down yields, said Oldshue. The 40-year maturities yielded 4.98 percent to 5.23 percent, which is 65 basis points to 90 basis points over the 4.33 rate for top-rated 40-year bonds.

Following are descriptions of pending sales of municipal debt in the U.S.:

CITY OF LOS ANGELES wastewater system, which serves more than 4 million people, will borrow $450.7 million next week, including $186.7 million in taxable Build America Bonds and $80 million in taxable Recovery Zone Economic Development Bonds. The securities will be used to finance construction and improvement of the wastewater collection and treatment system and refinance outstanding debt. Underwriters led by Siebert Brandford Shank & Co. will market the issue to investors, which is rated Aa2 by Moody’s and AA by S&P, both third-highest, one level below the AA+ grade from Fitch. (Added Oct. 7)

CITY OF CHICAGO will issue $251 million in Midway Airport revenue bonds next week. The debt for the second-busiest airport in Illinois behind O’Hare International will include $88 million in taxable Build America Bonds earmarked for construction. Underwriters led by JPMorgan Chase & Co. will market the securities, which carry ratings of A3 from Moody’s and A- from both S&P and Fitch, all fourth above non-investment grade. (Added Oct. 7)

UTAH plans to sell $201 million in general obligation bonds next week to refinance outstanding debt. The issue will backed by the full faith and credit of the state. The securities, rated highest by Moody’s, Fitch and S&P will be marketed by underwriters led by JPMorgan. (Added Oct. 7)