Tue 07/13/2021 17:28 PM
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Relevant Documents:
Notice of Repayment Deficiency Loan (July 9)
Operating Data for 2020 (June 30)
Notice of Potential Refinancing (May 26)
Quarterly Lodging Tax Revenue Data (May 25)
Official Statement (2021 Bonds)
Official Statement (2018 Bonds)
Official Statement (2010 Bonds)
Issuer Homepage

The Washington State Convention Center Public Facilities District in May notified its bondholders that it was evaluating “potential refinancing alternatives” concerning all of its over $1.6 billion of lodging tax revenue bonds. The bonds have been issued as far back as 2010, and the convention center collects a series of lodging tax revenue streams from hotels and web-based lodging services such as Airbnb, within Seattle and greater King County, as credit enhancement for debt service on the bonds. Within the past three months, the Washington State Convention Center has also incurred $4.3 million of repayment deficiency loans to the state (due to the fact that it used one particular lodging tax revenue stream to pay debt service to its bondholders, rather than to the state) and issued $342 million in junior bond anticipation notes.

In 2018 the Washington State Convention Center Public Facilities District issued $1.04 billion in lodging tax bonds in two series - $599 million first-priority bonds and $405 million subordinate bonds - to finance an addition to the Washington State Convention Center in Seattle. The bonds are payable from and secured by a pledge of lodging tax revenue derived from excise taxes imposed by the district on lodging within Seattle and greater King County. The bonds are neither payable from the operating revenue of the district nor secured by a security interest in the convention center. The first-priority bonds were issued pari passu with the district’s $272 million in Series 2010B lodging tax bonds.

The tax revenue collected by the district comprises three revenue streams: “Regular Lodging Tax Revenues,” “Extended Lodging Tax Revenues” and “Additional Lodging Tax Revenues.” Regular lodging tax revenue is derived from excise taxes for hotels with 60-plus units, at a rate of 7% in Seattle and 2.8% in the remainder of King County. Extended lodging tax revenue is derived from excise taxes for hotels with fewer than 60 rooms and from web-based businesses such as Airbnb, at the same rates (7% within Seattle and 2.8% in the remainder of the county); these taxes were authorized by legislation passed in 2018.

Additional lodging tax revenue is derived from an additional lodging tax of 2% within Seattle only, for hotels with 60-plus units as well as those with fewer than 60 units and web-based businesses. The additional lodging tax was imposed by the district to provide credit enhancement on its outstanding Series 2018, first priority and subordinate, and Series 2010B lodging tax bonds. The tax operates as a credit against the state sales tax otherwise due to the state from the taxpayers on which it is imposed. To that end, the district is required to transfer any collected additional lodging tax revenue to the state on June 30 each year. If the district uses such revenue for debt service on its bonds instead, then the deficiency is deemed to be a loan from the state for the district and must be repaid with interest.

While any such “repayment deficiency loan” remains outstanding, the district may not issue any indebtedness (other than additional repayment deficiency loans) without the prior consent of the state treasurer. Moreover, the district has agreed, as required by the legislation approving the excise of additional lodging tax revenue, not to issue additional bonds pari passu with the existing first-priority or subordinate lodging tax revenue bonds unless, generally, annual regular lodging tax revenue during a “base period” (that is, any 12-month period chosen by the district out of the 24-month period preceding the proposed issuance) is at least 125% of pro forma annual debt service in each year following the proposed issuance.

On July 1, the district applied all $4.3 million in additional lodging tax revenue that it collected for the fiscal year ended June 30 to pay debt service on its bonds, incurring a repayment deficiency loan of $4.3 million plus interest, according to a July 9 EMMA posting by the district disclosing an unscheduled draw on credit enhancement. This was in addition to last year’s repayment deficiency loan of $14 million on June 30, 2020, that the district applied to the interest payment due on July 1, 2020.

Although debt capacity for additional pari passu first-priority or subordinate lodging tax revenue bonds appears to be limited by the existence of the repayment deficiency loans due to the state, the district has taken advantage of its ability to incur additional junior debt. On April 14, the district issued $342 million in junior lodging tax notes, Series 2021 (Green Notes), using the proceeds to finance additions to the convention center with completion targeted for mid-2022, according to the official statement associated with the notes.

The Series 2021 notes are payable from pledged lodging tax revenue but are junior and subordinate to both the first-priority 2018 and 2010B bonds and the subordinate 2018 bonds. The Series 2021 notes are “bond anticipation notes” insofar as the district issued them in anticipation of issuing new senior bonds - meaning, pari passu with the first-priority 2018 / 2010B bonds or the 2018 subordinate bonds - upon the maturity date or earlier redemption of the Series 2021 bonds, once revenue allows for such an issuance.

It appears that the district continues to evaluate refinancing alternatives beyond its April issuance of bond anticipation notes. On May 26, the district filed a notice with EMMA saying that it “is in the process of evaluating potential refinancing alternatives concerning certain of its outstanding Lodging Tax Bonds” including the first-priority 2018 and 2010B, 2018 subordinate and junior 2021 notes. The district said it was evaluating “various refinancing alternatives” that “may include an advance refunding, tender offer, exchange offer, open market purchases, privately negotiated transactions or other alternatives” and “may consider proceeding with one or more refinancing alternatives that are expected to result in debt service savings.”

The district’s calendar year 2020 operating data paints a stark picture for how its lodging tax revenue was affected by the Covid-19 pandemic, with total lodging tax revenue of $27 million in 2020, down 77% from $118 million in 2019:

Moreover, the district’s lodging tax revenue has not fully recovered from the onset of the Covid-19 pandemic. Monthly lodging tax revenue was down in the first quarter of 2021 at $3.9 million compared with $8.2 million in the first quarter of 2020 and $18 million for the same period in 2019, according to the district’s most recent quarterly tax revenue disclosure from May 25. Although March 2021 had revenue of $1.6 million, up from $538,000 in March 2020, monthly revenue was still well below the reported numbers from March 2019 of $7.2 million:

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