The sale of state-enhanced bonds for Atlantic City, N.J. will remove a "major short-term obstacle" at the distressed municipality, but the city still faces long-term risks due to "numerous financial challenges," according to Moody's Investors Service.
Atlantic City was scheduled to sell $40.5 million in general obligation bonds on May 19 and 20 enhanced by New Jersey's Municipal Qualified Bond Act program, with proceeds being used to pay off a $40 million emergency state bridge loan owed by the end of May.
The city is also planning to issue $12 million of additional MQBA bonds before Aug. 4 to address maturing bond anticipation notes.
Both GO taxable refunding bonds were rated A-minus with a stable outlook by Standard & Poor's, based on the Garden State's credit rating.
"The MQBA enhancement should improve the city's market access," said Moody's analysts Josellyn Yousef, David Strungis, Orlie Prince and Naomi Richman in their May 19 piece. "However, the relatively narrow debt service coverage from state aid makes it unclear whether the city's bonds would carry the MQBA program rating (A3 negative), or a somewhat lower rating."
The Moody's analysts noted many financial challenges facing Atlantic City after the May 19 sale including a $101 million budget gap for the fiscal year ending Dec. 30, poor liquidity, and ongoing property tax appeals on casino properties.
Increasingly relying on MQBA-enhanced debt also means the cushion state aid provides to cover debt service will decline and thus raise uncertainty on whether bonds can be paid sufficiently with this funding, the analysts said. Moody's rates Atlantic City speculative grade Caa1 with a negative outlook.
New Jersey's MQBA is a state intercept program that diverts a municipality's qualified state aid to the trustee for debt service payments.
Moody's said since the state aid never reaches the city's coffers, the protection is similar to Detroit's distributable state aid bonds that avoided payment interruption during its recent bankruptcy.
Moody's warns that additional MQBA bond issuances by Atlantic City could weaken its debt service coverage levels. The rating agency notes that the city indicates in its offering document the possibility of issuing tax appeal refunding bonds for its $183 million in outstanding tax appeal settlements.
"If all of this debt is issued through the MQBA program, debt service coverage could decline to at or near one times qualified state aid depending on interest rates," the Moody's analysts said. "The state Local Finance Board will only approve an MQBA bond issuance if revenues are at least sufficient to meet debt service."
Atlantic City emergency manager Kevin Lavin issued a short-term plan on March 23 to address the city's $101 million structural deficit that included the potential of debt payment deferrals. Moody's noted that some steps have already been taken including $7 million in salary and wage savings from 195 layoffs, but proposed bills to redirect $47.5 million of additional revenues from the Atlantic City Alliance Fund and Investment Alternative Tax remain stalled in the state legislature.
"Without a significant liquidity infusion in 2015 and significant increase in recurring revenues, debt service payments still remain highly susceptible to default in 2015 and the city's future operations continue to face pressure from a large structural deficit," the Moody's analysts said.
