Can State Actions Trigger Contagion?

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February 5, 2014

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Atlantic City? Has the Governor’s Action Caused Contagion? Atlantic City’s ability to refinance its maturing $12.8 million bond anticipation notes through an expensive short-term loan this week demonstrates “limited market access”, according to Moody’s Investors Service, which had dropped the city to junk in July because of its the dependence on casinos, and then last month downgraded its credit rating on $344 million of Atlantic City debt to Caa1, seven levels below investment grade, citing Governor Christie’s move to install an emergency-management team which includes Kevyn Orr, the former Detroit emergency manager, brought in by the Governor in what many believe to portend a municipal bankruptcy filing, or, as Daniel Solender of Lord Abbett & Co. in Jersey City yesterday put it: “The whole perspective for investors changed once Orr got involved, just based on how he approached Detroit.” Or, perhaps as Atlantic City Mayor Don Guardian put it: “Everyone is nervous. The term emergency manager, I think, scares people away, even though the governor has indicated these are more counselors and tools or experts to help us get through that and doesn’t indicate bankruptcy.” There is a little sense here of the old Abbott and Costello routine: “Who’s on first, What’s on second, I Don’t Know is on third;” but the lack of governance certainty, and seemingly 180 degree turn in the State of New Jersey’s policy with regard to municipal fiscal distress is creating significant and contagious costs to other New Jersey municipalities. The financing, Atlantic City’s first test of market access after the appointment of an emergency manager and Mr. Orr late last month, combined with what appears to be an overt, 180 degree change in the state’s policy, has clearly resulted in an immediate and costly fiscal impact to other New Jersey cities—or, as we have noted earlier from Municipal Market Analytics: “[E]very New Jersey local government issuer’s credit quality is weaker because reliable, [municipal] bondholder-friendly state support has evaporated—something stunning to behold when graphically envisioned when looking at the costs to Jersey City in the wake of the Orr appointment (also from MMA). MMA’s analysis—as graphically portrayed above, demonstrates that the abrupt and sharp change in state policy is a message investors have received—and acted upon in real time—with significant, adverse impact on the state’s 565 municipalities. As for Atlantic City—on a teeter totter of governance uncertainty with regard to whether its elected leader or the state is in charge of its fiscal direction, the whirlwind of events and uncertainty have already imposed damaging costs. Moody’s has expressed angst about Atlantic City’s liquidity position, noting it is already pressured from a struggling property tax base and the risks of additional property tax delinquencies. And now, it confronts its next fiscal deadline in ten days with a debt service payment of roughly $3.35 million, only to be followed by repayment deadline of March 31st to the State of New Jersey on a $40 million state loan—a date by which, as Moody’s moodily notes: “[W]e will have more clarity on the emergency manager’s plan and whether it includes a recommendation for a bankruptcy filing and/or adjustment of the city’s debts.”

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