Atlantic City EM Plan Draws Brickbats from Moody's

Atlantic City, N.J. emergency manager Kevin Lavin’s suggestions for tackling the city's fiscal crisis are a credit negative since his plan could open the door to default, according to Moody's Investors Service.

 Lavin's March 24 report identified a $101 million budget gap for 2015 and outlined plans over the next three months to negotiate with seven different stakeholder groups, including casinos and bondholders, to design a long-term restructuring plan.

Moody's analysts Josellyn Yousef, Orlie Prince and Naomi Richman said in a March 25 report that Lavin's proposals are credit negative since in addition to opening up the possibility of the city defaulting on its debt, the timeline relies on rapid legislative action, state aid and "timely tax payments from struggling casinos." Atlantic City is also faced with having to access the capital markets by March 31 if it does not receive an extension of $40 million loan payment from the state.

Lavin's plan calls for the legislature to pass two bills proposed late last year that would direct $17.5 million in excess investment alternative taxes on gaming revenues and $30 million of Atlantic City Alliance marketing funds to the city. Debt service payments due on Aug. 1 and Dec. 15 may be at risk if the two bills aren't adopted "swiftly" and a revenue infusion does not come in time, according to Moody's. Lavin also proposes the city delay or defer $42 million in state health and pension benefits for the year, which may require state approval.

"Given the city’s cash flow projections and assuming that pension and health benefit payments are delayed or deferred, the state legislature will have only three months to adopt the two bills before the city reaches a liquidity and debt service crisis," said Yousef, Prince and Richman in their report. "His potential options for long-term restructuring include potential impairment to bondholders in the form of restructuring amortization schedules and the extension of maturities. We may consider any of these events to be a default or distressed exchange, in line with our Caa1 rating on the Atlantic City’s general obligation debt."

The Moody's analysts also noted that the potential for late or delinquent property taxes from casinos is not included in Lavin's "already dire liquidity projections," but is also a cause for concern.

A spokeswoman in the office of Atlantic City Mayor Donald Guardian's office said Thursday morning there was no immediate comment on the Moody's report or the emergency manager’s proposal. Standard & Poor's announced Wednesday it was reviewing its BB bond rating on Atlantic City in response to Lavin's report due to the chance of debt payment delays.

Moody's downgraded Atlantic City's $344 million in general obligation debt six notches to Caa1 from Ba1 Jan. 23 after New Jersey Gov. Chris Christie appointed an emergency management team that included Lavin and Kevyn Orr, the emergency manager who steered Detroit into bankruptcy.