Indianapolis bond bank deal puts city directly in convention center hotel business

BY SourceMedia | MUNICIPAL | 11/14/23 01:06 PM EST By Rich Saskal

Indianapolis plans to issue bonds this week to finance the city's entry into the convention center hotel business with a deal that has put a small smudge on the city's shiny bond ratings.

The city through its Indianapolis Local Public Improvement Bond Bank is selling $591.8 million of debt to finance construction of what will become an 800-bed headquarters hotel for the Indiana Convention Center, and expand the convention center itself.

"This is going to be a transformational downtown hotel development for the city," Sarah Riordan, the Indianapolis city controller, said in an online investor presentation for the revenue bond portion of the multifaceted deal.

That transformation has cost the city its positive outlook from S&P Global Ratings, which ahead of the deal revised the rating outlook to stable on the city's AA-plus issuer credit rating and general obligation bond ratings.

"The outlook revision reflects a change in a debt profile that in our view will be risker after the hotel bonds are issued. If hotel revenues do not come in as expected, we think this could potentially add costs to the budget that were not there before," the agency said in its rating report Friday. "The overall and direct debt burden also weakens moderately post bond issuance."

The deal will finance construction of an 800-room convention headquarters hotel bearing the name Signia, a new Hilton brand focused on the meeting and events business.

The bond deal has four main components, starting with three revenue bond tranches slated to price Wednesday, according to the investor presentation.

The $184.6 million of senior convention center hotel revenue bonds, Series 2023E, will stand on their own as a credit, carrying a preliminary investment-grade BBB-minus rating from S&P.

That rating is based on the agency's view of the key risks and strengths of the hotel project's construction and operations, including a "relatively simple construction task of a typical high-rise building" managed by experienced stakeholders, "but with relatively weaker risk transfer to its construction manager, Hunt Construction Group."

The city's Capital Improvement Board and Hunt Construction have a guaranteed maximum price agreement capped at $501.06 million.

That $501 million hard cost, plus other costs, brings the total project cost to $640 million, according to the investor presentation.

S&P's analysis of the operations phase "reflects the hotel's dependence on Indianapolis' cyclical and competitive lodging market to attract transient guests and its reliance on the ICC's ability to attract large and frequent group bookings," S&P said. It assigned a stable outlook to the revenue bonds.

Final ratings on the senior revenue bonds will depend upon receipt and satisfactory review of all final transaction documentation, including legal opinions, the rating agency said.

Underneath the senior bonds are two series of subordinate revenue bonds.

The $200 million Series 2023F-1 is supported by the city's moral obligation pledge and insurance from Build America Mutual.

The city's pledge brings an underlying rating of A-plus with a stable outlook from S&P, lifted to AA with the enhancement of the BAM wrap.

"They will also have a surety policy from BAM in lieu of a debt service reserve fund," Piper Sandler Managing Director Brad Langner told the investor presentation.

Piper Sandler (PIPR) is underwriting the revenue bonds.

The $52.2 million Series 2023F-2 subordinates, uninsured and without a moral obligation pledge, are unrated.

The final piece of the financing, with pricing slated Thursday, is $155 million of Series 2023D ad valorem property tax-funded project revenue bonds in a deal led by BofA Securities.

Those bonds are secured by an ad valorem special benefits tax levied on all taxable properties in the City of Indianapolis Redevelopment District, which has the same boundaries and same tax base as the city. The district "reasonably expects" to fund debt service through tax increment revenues, according to the investor presentation.

They are being issued primarily to expand the convention center itself, including the new 50,000 square foot ballroom, a pedestrian skybridge and additional meeting space.

That deal carries the city's GO ratings: AA-plus from S&P, and triple-A ratings from Fitch Ratings and Moody's Investors Service (MCO) that both agencies affirmed last week.

For both the revenue bonds and the ad valorem bonds, Crowe LLP is the municipal advisor and Faegre Drinker Biddle & Reath LLP is bond counsel.

The city already has a 1,005-bed J.W. Marriott convention center hotel, on the opposite side of the venue from the planned Signia.

It's part of what Visit Indy, the city's official destination marketing organization, describes as a network of 4,700 downtown hotel rooms that are connected by climate controlled sidewalks to the Indiana Convention Center and Lucas Oil Stadium, the NFL Indianapolis Colts' stadium that can be integrated to the convention space. There are 7,500 total downtown hotel rooms, the organization says.

A second convention center headquarters hotel will allow the city to extend its marketability, city officials say.

"It will provide us in the city with the ability to book simultaneous citywide events," Riordan said.

The project will add, in addition to the hotel rooms, more than 300,000 square feet of space to the already 566,000-square-foot Indiana Convention Center.

A key piece of the project is the addition of a second major convention center ballroom.

"That will allow the city to host multiple conventions simultaneously," Riordan said.

And adding a brand in the Hilton family will also broaden the city's appeal to visitors and event organizers, Leonard Hoops, president and CEO of Visit Indy, told the investor presentation.

"We're a very Marriott (MAR)-dominated downtown," he said.

"Our two largest Hilton properties are both under 400 rooms," Hoops said. "Having an 800-room Signia completely changes the game with Hilton-loyal customers."

The city bond financing package was needed to rescue the project after a private developer stumbled on the financing end.

The Indianapolis-Marion County Council signed off on the arrangement in June meeting on a 20-5 vote.

Opponents on the council questioned the city's ownership of a hotel that would compete with the private sector and voiced worries about whether it would eventually cost the city should hotel revenues fall short.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.