Gambling on Atlantic City’s Future

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April Fool’s Day, 2015

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Gambling on Atlantic City’s Future. Ted Molin, a senior credit analyst at Wilmington Trust Co. in Delaware, yesterday warned that Atlantic City’s fiscal crisis may prompt New Jersey to depart from its historic practice of supporting local-government finances. The warning, which came as the city’s state emergency-management team hired by Governor Chris Christie is considering deferring municipal bond payments as part of an effort to address the city’s fiscal plight; but, Mr. Molin notes, asking bondholders to accept less than what they are owed by the municipality would undermine New Jersey’s reputation for nurturing distressed cities: “We’ve always taken comfort in the strong state oversight of local governments…I was hoping that Atlantic City’s situation was so dire and unique, and it doesn’t necessarily represent a policy change, but I’m starting to have my doubts.” The question about the state role and its possible change would not, after all, only impact Atlantic City. As we have already noted, the tremors there have increased borrowing rates for other New Jersey municipalities already—or, as the insightful fabulous Matt Fabian of Municipal Market Advisors puts it, there could be contagion looming: “For cities with even a chance of distress, you have to assume the state would pursue bondholder losses.” Moody’s has already placed seven other New Jersey cities on review for a ratings cut, saying the Governor’s appointment of the emergency manager for Atlantic City “may demonstrate a limit to the state’s willingness to provide emergency financial support to other municipalities.” Moreover, the Moody analysis added that New Jersey’s own “constrained” finances increases the risk of its curbing local aid. (New Jersey has had eight credit-rating downgrades under Gov. Christie amid revenue shortfalls and rising costs for pensions, benefits and debt service.) The yawning Atlantic City fiscal gap, which emergency manager Kevin Lavin reported to be $101 million, means the manager—together with co-governing leader Mayor Don Guardian―will force the divided governance structure to consider the report’s listed potential cuts, including eliminating jobs and renegotiating employee-benefit payments. Mr. Lavin’s plan calls for proposing a restructuring and negotiating with creditors and unions through June 30th. And time will not be a luxury: Moody’s has already warned that debt payments in August and December may be at risk absent quick state action to prop up the city. Nevertheless, Michael Stinson, Atlantic City’s revenue and finance director, said the emergency manager team “should be viewed as a positive” development: “We’re working collaboratively with the state,” he said. “Everybody’s on point that what needs to get done will get done in the time frame that needs to get done.” Mr. Stinson reports Atlantic City plans to sell long-term bonds by May to refinance notes due in August and a state loan due June 30th, noting that the city would still have market access if the team takes actions such as extending debt maturities: “As long as it makes sense, and everybody’s in agreement and it’s not done unilaterally, it could be worked out.” Atlantic City yesterday was granted a 60-day extension on a $40 million state loan that was due today, with Atlantic City Revenue Director Michael Stinson, noting that the city has been working with the state for the last month to seek more time for the loan payment. New Jersey had provided Atlantic City with the $40 million emergency loan after the city delayed a $140 million bond issue last November. Mr. Stinson noted that the extension marked a “first step,” and that it would be helpful in the city’s ability to “move forward.” Paul Brennan, a money manager in Chicago at Nuveen Asset Management, said he expects insurance to cover any debt-service shortfalls in Atlantic City―but the odds are not quite so rosy for most Atlantic City investors: about 58 percent of the city’s municipal debt carries no insurance, according to data compiled by Bloomberg. That is, in rolling the die, the city is caught between a rock and a hard place—or, as Dan Solender, who helps manage $17 billion as director of municipal securities at Lord Abbett & Co. in Jersey City puts it: “Why would you lend them money if they’re already cutting the payments to existing lenders?”

Where is the State? New Jersey Senate President Steve Sweeney yesterday called on Governor Chris Christie to put an end to the uncertainty on his legislative plan to help end Atlantic City’s ongoing fiscal crisis and to take a clear and definitive stand in support of the bills before the financial distress grows worse and further undermines the stability of other cities: “The absence of the Governor’s support has allowed the fiscal crisis to grow worse for Atlantic City and to threaten the financial stability of other cities…The uncertainty and doubt by the administration is fueling the fires of instability. The Governor needs to take a stand or the situation will only get worse.” Sen. Sweeney is insisting that Gov. Christie voice support for a package of bills to aid Atlantic City and its casinos before they can be voted upon. The Senator hand-delivered copies of the bills — which still have not received final votes in the Legislature — to Gov. Christie’s office yesterday, afterward telling the Associated Press he will not post them for final votes unless Gov. Christie indicates support, saying that emergency managers appointed by the governor have spooked Wall Street and led to costly credit downgrades for Atlantic City, adding that the Governor’s failure to publicly support the legislative recovery plan has added to the instability: “Sending him legislation absent his support would send another destabilizing message to Wall Street, which would make the situation even worse.” Senate President Sweeney added that, from his perspective, the appointment of the bankruptcy managers and the subsequent issuance of their report made the situation worse by lowering the credit rating for Atlantic City below junk bond status and undermining the finances for seven other cities in New Jersey. The recovery plan, sponsored by Senators Sweeney and Sen. Jim Whelan, he believes would bring economic stability to Atlantic City and its casinos and enable the city to take advantage of its potential for economic growth, including a financially-healthy gaming industry.

New Jersey League of Municipalities President, Mayor Brian Wahler of Piscataway, yesterday was succinct: “What happens in Vegas, stays in Vegas. But what happens in Atlantic City has repercussions that will be felt throughout the State…We take great pride, and our municipalities benefit from the fact, that the State of New Jersey has a strong tradition of working with local elected leadership in severely distressed municipalities, to help them honor their obligations without resorting to, or even considering, as an option, municipal bankruptcy. In response to concerns raised in the bond markets by the Detroit bankruptcy, State officials have repeatedly reasserted this commitment, over the past two years. That commitment had strengthened the overall view of the rating agencies of the credit-worthiness of local governments throughout New Jersey. Given the State’s past record of careful and prudent intervention in severely troubled municipalities, we remain hopeful that responsible actions will be taken by State policy makers to relieve the pressures currently threatening Atlantic City and to reassure the bond ratings agencies of the stability of local finances throughout our State.”

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