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Dallas Convention Center Hotel
Convention Center / Hotel
Case Study: Dallas Issues $479.8 Million in Bonds for Convention Center Hotel Project
Client Since: 1956
Services Provided by FirstSouthwest: Financial Advisory
Background
Dallas, Texas, is a top ranked convention city but it currently does not have a hotel attached to its 2.1 million square-foot downtown convention center. As a result, the city of Dallas estimates it has missed out on more than $128 million in revenue since 2002 as convention and tradeshow industry organizers have booked their events elsewhere.
For more than five years, the city has attempted to develop the hotel project and has overcome numerous obstacles and challenges including a strong voter initiative against the project. The hotel project is critical to Dallas’ ability to maintain its position within the convention and tradeshow industry and to recapture the lost business related to the lack of a convention center hotel. In May 2009, Dallas voters approved a new 1,000-room convention center headquarters hotel which is expected to open in early 2012.
The Challenge
The bond market had been highly unpredictable since Wall Street’s meltdown in 2008. The city of Dallas was waiting for the right interest rate environment in which to sell its hotel revenue bonds. A new hotel project would be affordable only if the city could sell 30-year bonds at interest rates of 5.5 percent or lower.
The FirstSouthwest Solution
FirstSouthwest planned to conduct a successful pricing while limiting the true interest cost (TIC)–net of the Build America Bonds (BABs) subsidy payments–to less than 5.5 percent. The uninsured transaction was rated A2/A+ and was the first hotel financing incorporating bonds authorized under the American Reinvestment and Recovery Act.
The pricing consisted of a retail order period on Monday, August 17, 2009, followed by an institutional pricing on Tuesday, August 18, 2009, during which FirstSouthwest advised the Dallas Convention Center Hotel Development Corporation on a $479.8 million hotel revenue bonds, series 2009A,B,C financing.
During the retail order period, the market experienced a rally that enabled FirstSouthwest to lock in the BABs pricing and some of the tax-exempt serial maturities. The institutional market proved very receptive to the tax-exempt offering, and by late-morning of August 18, 2009, the underwriting team successfully marketed all the bonds.
The series 2009 bond proceeds, along with other funds, were used to acquire six acres of land from the city for the hotel site and to finance the costs required to design, construct, equip, furnish and open a four-star full-service convention center headquarters hotel.
The proceeds also fully funded a debt service reserve fund, capitalized interest six months beyond the projected hotel opening date, provided an initial deposit for the hotel’s operating expense reserve fund and paid certain costs of issuance.
The series 2009 bonds garnered a net true interest cost of 4.78 percent–72 basis points below the desired target. The net all-in borrowing rate was nearly 70 basis points below the TIC target, at 4.82 percent.
The Result
The lower net interest rate of 4.78 percent reduced the overall cost of the project as well as the amount of debt service and also positioned the hotel to become profitable more quickly. Had the bonds sold at the higher rate of 5.5 percent, the city of Dallas would have paid an additional $3 million in debt service per year for 30 years.