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City of Baltimore Selling $301.7 million in Revenue Bonds to Finance
 the Publicly Owned 756-room Hilton; City Expects
 an Interest Rate Below 5%
The Baltimore Sun
Knight Ridder/Tribune Business News

Jan. 20, 2006 - Baltimore's planned $305 million convention headquarters hotel will carry risks such as operating in an intensely competitive convention and lodging business and depending upon increased attendance at the city's flagging convention center, rating agency Standard & Poor's said yesterday.

But even in a down market, the rating service said, the city should be able to repay the $301.7 million revenue bonds the city expects to sell next week to finance the publicly owned 756-room hotel. The new, 19-story Hilton will be built by 2008 on two lots bounded by Howard, Camden, Paca and Pratt streets and connect to the Baltimore Convention Center.

Citing the risks of a start-up hotel and optimistic projections for occupancy and revenue, Standard & Poor's yesterday assigned its lowest investment grade rating, BBB- to $247.5 million in senior revenue bonds. The rating service assigned a junk bond rating, BB, to $54.2 million in subordinate revenue bonds.

But the $247.5 million bond issue will ultimately go to market with a AAA rating because of an agreement the city has reached with a bond insurer, said Stanley Milesky, the city's Chief of the Bureau of Treasury Management. That insurance will take effect as soon as the bonds are sold, based on an agreement reached with insurer XL Capital Assurance Inc., Milesky said.

"I'm really pleased to have the triple B rating," Milesky said of yesterday's rating assignment by Standard & Poor's. "It will ultimately appear as triple A. From the market standpoint, it doesn't matter if it's natural or assured."

The $54.2 million in subordinate bonds will not be insured because the premium would cost more than the higher interest rate, he said.

The city expects to obtain an interest rate below 5 percent on the senior bonds and just above 6 percent on the subordinate bonds, Milesky said.

In its analysis, Standard & Poor's said credit concerns include the hotel's exposure to the cyclical and competitive convention market and the need for the convention center to maintain or increase attendance, which has grown little since the center's expansion in 1998. City officials have said Baltimore will continue losing convention business to other cities without a convention hotel that can commit blocks of discounted rooms to convention-goers.

"Several hotels in downtown Baltimore market have comparable facilities and significant penetration in the business-meeting segment, and it will compete directly with the proposed hotel," the analysis by credit analyst Matthew Hobby said.

Standard & Poor's also said it considered projections for financial performance "aggressive" because they assume that the strong Baltimore hotel market will not be hit by any downturn and will continue to grow. "To achieve projected market penetration, the hotel must gain market share at the expense of existing hotels or increase convention center attendance," it said.

The rating service also said the 30-year term of the bonds could expose lenders to increasing competition and deteriorating physical condition of the hotel.

But the risks are slightly lessened by the city's backup pledge of $7 million in annual city hotel occupancy taxes, the analysis said. In its favor, the report said, the hotel will have prime location in the Inner Harbor, a market that had above average hotel occupancy rates in 2004, and management by Hilton Hotels Corp., which offers strong marketing as well as a $25 million guarantee toward the debt service.

One analyst yesterday said it is not unusual for a bond issue to come to market with an underlying rating, that is less than the insured rating.

"That is typical," said Dick O'Brien, senior vice president and director for the Hunt Valley office of Washington-based brokerage firm Folger Nolan Fleming Douglas. "The issuer pays a fee to the insurance company to obtain the AAA rating of the insurance company, and so the potential investor looks to the insurance company as the ultimate source of repayment."

Already, interest is strong in the bond market, Milesky said yesterday. He said city officials and hotel planners fielded questions yesterday during a conference call with about 50 investors interested in buying bonds.

"We're very excited about the interest we've gotten so far," Milesky said. "The demand for rooms in downtown is so strong that we think this hotel will do well, and the market appears to agree with us. We have a long history here in Baltimore of having a robust hotel business."

The competitive conference center market should not be a major concern, he said. "We will be filling those rooms with convention and non-convention guests, so I don't see any problem here for us," he said. Contributions have been built into the hotel operation to keep up furniture and fixtures, so deterioration of the facilities -- also mentioned in the Standard & Poor's analysis -- should not present a problem, he said.

Milesky expects the bonds to be priced on Thursday and available for sale either the same day or the next day. City economic development officials have said they expect construction to start shortly after the bonds go to market.

By Lorraine Mirabella and June Arney


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