Why Atlantic City Is Near Default

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Cash-strapped Atlantic City is only five days from $3.4 million debt service payment default.

The default will come unless Atlantic City reaches agreement with the New Jersey state government on a bridge loan, according to Moody's Investors Service.

The state agreed to issue Atlantic City a bridge loan in May as part of a recovery package to avoid an immediate default, but has only recently begun proposing terms to the city, according to a Moody's report released Wednesday afternoon.  Moody's analyst Douglas Goldmacher said a sign of how much city officials need the loan occurred when the state had to step in to make an $8.5 million payment owed to the Atlantic City School District on July 15 that will be deducted from its final loan amount.

"The city has requested and the state has agreed to a $74 million loan, but the terms have not been publicly announced and no formal agreement has been reached," said Goldmacher. "The legislation did not outline the terms for the loan, leaving it to the state's Division of Local Government Services to negotiate with Atlantic City management."

Goldmacher noted that negotiations with the state are underway and if the loan can be executed this week it would help the Jersey Shore gambling hub avoid default Monday and make payments on an additional $18.6 million owed in debt service for the rest of 2016. The funds could also help the city devise a five-year financial plan required by early November as part of the rescue legislation, Goldmacher said.

"Absent any receipt of state support, we believe a default would likely set off a series of missed debt payments and revive the prospect of Atlantic City filing for bankruptcy, or pursuing debt restructuring outside bankruptcy, which we would consider a distressed exchange," said Goldmacher.

The recovery agreement also included provisions that allow Atlantic City's eight remaining casinos to make payments in lieu of taxes for 10 years. Goldmacher said the PILOT conversion will help the city eliminate the risk of owing casinos tax refunds after losing tax appeal cases. The casinos are slated to collectively pay $120 million in 2017.

The press office for the state's Local Finance Board did not immediately respond for comment on the status of the loan agreement. Atlantic City Mayor Donald Guardian said during a community meeting Tuesday night that the city is close to finalizing the loan.

Goldmacher noted that the city is also looking to tackle other debt challenges including $228 million in bonds issued to cover tax appeal refunds incurred between 2010 and 2015. The city also owes an additional $165 million in refunds to Borgata Hotel Casino and MGM Mirage. Borgata and MGM Mirage have taken a combined $17 million credit against their 2016 year-to-date property taxes as partial payment for the owed refunds, according to Goldmacher.

"The city is responsible for any refunds owed on taxes paid to the city, the county and school district," he said. "Both the city and state are negotiating with the casinos to adjust future payments and make payment arrangements." 

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