November Atlantic City Default Feared

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Atlantic City is in danger of missing its November debt service payment after it violated a term of a state bridge loan, according to Moody's Investors Service.

New Jersey's Local Finance Board informed the distressed city on Sept. 22 that it has until Oct. 3 to cure the breach of a $73 million bridge loan agreement term that required dissolving the Atlantic City Municipal Utilities Authority by Sept. 15. Moody's noted in a report Thursday that the impending technical default is a credit negative because it "indicates a disconnect between the city council, mayor, and state."

Moody's rates Atlantic City bonds at Caa3 with a negative outlook.

Atlantic City Mayor Donald Guardian announced Monday that the MUA has agreed to purchase the city's former airport property, Bader Field, for more than $100 million, with the proceeds to be used to pay off outstanding Atlantic City debt. The mayor emphasized that the purchase sets up a monetization of the water authority as called for under the state's late May rescue package and therefore the state should not be able to seize the utility as entitled under terms of the bridge loan. The city requested that the Local Finance Board waive the technical default saying it believes it is on verge of announcing a full-scale plan to address its financial challenges.

If Atlantic City does not cure the default by Oct. 3, the state can demand immediate repayment of the bridge loan while also seizing the MUA and Bader Field. The state has not commented yet on the Bader Field plan.

"Without the state funds from the bridge loan, or if the state does not release the Atlantic City Alliance and investment alternative tax funds owed to the city, it is highly improbable that the city will be able to make its November 1 $9.4 million bond payment," said Moody's analyst Douglas Goldmacher in the report. "Should the MUA sale of Bader Field occur, the $100 million would be sufficient to repay the state and cover debt service. However, the proposed sale raises many questions."

Goldmacher noted that at the end of 2015 the MUA had $7.9 million in unrestricted cash and investments and it would need to borrow nearly the entire sum pledged for the Bader Field purchase. He added that with the authority rated junk-level B3 by Moody's, and with risks associated to its connection with Atlantic City, market access is uncertain.

"Even if the authority were to have market access, borrowing $100 million would increase its debt by a factor of seven, raising the question of how the authority would pay for this debt – assuming the plan went through, which is far from certain," said Goldmacher.

Goldmacher also questioned the $100 million figure since an auction run by the city this summer for Bader Field generated a high bid of $50 million.

"Although Mr. Guardian stated that this plan would likely resolve the technical default, it would require close collaboration between the state, city, and authority," said Goldmacher. "Although the mayor, authority, and city council president appear to support the plan, approval is still required from the city council and state."

 

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