CHICAGO -- Illinois' largest single bond issue ever is scheduled to be sold tomorrow by the Metropolitan Pier and Exposition Authority, with the proceeds targeted for expansion of the McCormick Place convention center in Chicago.

The $879 million of revenue bonds will be priced in a deal headed by Smith Barney, Harris Upham & Co., the bookrunner, and Donaldson, Lufkin & Jenrette Securities, the co-senior manager.

The bonds will be backed with revenues from a tax package approved last year by the Illinois General Assembly for the project, which will double the size of the facility. Security for the issue is provided by a set amount of annual state sales tax revenues, subject to annual appropriation by the legislature. In addition, some of the maturities will carry bond insurance.

The tax package is projected to raise $57 million in fiscal 1994, which begins July 1. The package contains a 1% restaurant tax within a special downtown Chicago and city airport taxing district that is projected to raise $11.9 million; a 2.5% hotel room tax in Chicago, projected to raise $16.6 million; a 6% tax on auto rentals in Cook County that is expected to raise $21.7 million; and per-ride fees of 75 cents to $1 on taxi, limousine, and bus rides to and from Chicago's two major airports that are projected to raise $7 million.

The taxes are projected to provide a little more than one-times-debt service coverage on the bonds, according to Ray Kljajic, a managing director at Smith Barney.

In addition, the authority has the ability to tap a portion of any surplus from the Illinois Sports Facilities Authority, which was set up in the late 1980s to finance a new baseball park, for debt service. The Metropolitan Pier and Exposition Authority projects it will receive $2.6 million in surplus funds in fiscal 1994.

The authority has projected that all of the revenues, except for the airport ride fees and the sports authority surplus, will grow by 5% each year through fiscal 2004.

The issue will contain approximately $651 million of current interest bonds that will include about $264 million of serial bonds carrying maturities from 1995 to 2006, $54 million on term bonds due June 15, 2022, and $332 million of term bonds due in 2027. All but the $30 million of serial bonds due in 2004, which will be marketed as jumbo premium bond strips, will be sold unenhanced. The premium bonds will be insured by AMBAC Indemnity Corp.

About $164 million of capital appreciation bonds, carrying maturities from 2008 to 2021, and about $62.7 million of deferred interest bonds, maturing in 2007 and 2012, will be insured by Financial Guaranty Insurance Co.

"We wanted to have a number of different securities to attract the broadest variety of investors," Kljajic said, adding that both retail and institutional interest is anticipated in the bond issue.

Several traders yesterday speculated the top yield for longer bonds would be between 6.40% and 6.45% for insured bonds. While underwriters said the insured portions of the issue will carry a triple-A rating from the rating agencies, the $621 million of unenhanced debt was rated A-plus by Standard & Poor's Corp. and Fitch Investors Service and A by Moody's Investors Service.

Rating agency officials said they looked primarily at the state sales backup of the bonds for the rating due to the uncertainty over projections of how much revenue the authority's tax package will actually collect.

Ernie Perez, a director at Standard & Poor's, said the authority's taxes are not broad-based or predictable enough to earn an A-plus rating on their own. He said the issue was rated solely on the state's pledge of sales tax revenue.

The deal is structured so that the state will set aside a fixed amount of sales tax revenues each year, starting with $53 million in fiscal 1994 and growing to $93 million by fiscal 2004 and beyond. That money will be made available for debt service if revenues from the authority's tax package fall short of needs.

Kljajic pointed out that annual debt service on the bonds is limited to the amount of sales tax money the state is scheduled to appropriate each year for the security pledge on the bonds. Maximum annual debt service is estimated at $81 million.

Another $25 million statutory reserve fund, made up of authority tax revenues already collected this year, will also provide an interim backup to debt service, according to public finance officials working on the deal.

Proceeds from the bond issue will be used to acquire property and design and build a 1 million-square-foot expansion of McCormick Place, the nation's largest convention center. Some remodeling of the 1.2 million-square-foot existing facility is also included in the project.

"It means that Chicago and the state are going to maintain their preeminent position as the leading center for conventions and trade shows in the country," said John Schmidt, chairman of the authority.

He said the expansion should allow the center to better accommodate concurrent trade shows, and that the project should add $2 billion to the $3.5 billion of annual business activity for Chicago and the state generated by McCormick Place. The $987 million expansion project is set to be done by 1997.

In 1991, the state Assembly authorized the issuance of up to $937 million of bonds by the authority for the project. Kljajic said that while the authority is issuing only $879 million of bonds, the deal is expected to raise the $987 million needed for construction costs through interest earnings, the use of a surety policy from FGIC in place of a cash reserve fund, and the addition of premium bonds. Schmidt said there are no plans to issue additional debt.

Last month, the Illinois Supreme Court upheld the constitutionality of the restaurant tax in a lawsuit brought against the authority by restaurant owners and patrons in the special taxing district.

A second lawsuit, brought by suburban and out-of-state limousine and bus companies challenging the constitutionality of the perride fees, is pending in Cook County Circuit Court. Authority officials have said that suit has no merit and would not affect the revenue stream for the bond issue.

The deal, which is scheduled to close on Jan. 5, has 23 co-managers, including several woman- and minority-owned firms, as well as Chicago-based firms.

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