Atlantic City gets S&P rating lift to BB-minus and a positive outlook
Atlantic City has a better junk bond rating following an S&P Global Ratings upgrade Thursday.
The rating agency raised the faded New Jersey gambling hub's underlying rating two notches to BB-minus from B citing improved budget conditions coupled with a continued state supervision period slated to last another two years. The upgrade affects the city's general obligation debt and service contract-backed obligations with the Atlantic City Municipal Utilities Authority.
S&P assigned a positive outlook at the new rating. The city remains three notches away from an investment-grade rating, though it is seven notches higher than S&P rated it in early 2017 just after a five-year state control period took effect.
"The upgrade reflects our opinion of the city's improved operating environment and structural financial improvement following the settlement of outstanding tax appeals and other payables, easing concerns over liquidity and the city's ability to produce balanced operating results, despite its economic challenges, in the near term," S&P credit analyst Victor Medeiros said in a statement. "The upgrade also reflects the continuation of extensive state intervention, which we believe provides the city the necessary support required to withstand a modest level of stress and meet its financial obligations--in line with other 'BB' category rated peers.”
The ratings agency has given Atlantic City since New Jersey Department of Community Affairs began a state takeover of the city’s finances in November 2016 when the city was on the verge of a default. S&P’s Atlantic City rating is two notches higher than Moody’s, which rates the city’s general obligation debt B2 with a positive outlook.
Medeiros noted that since S&P last upgraded Atlantic City four notches in October 2018 after the resolution of outstanding casino tax appeals, the city has reported consecutive surpluses stemming largely from a 10-year payment-in-lieu-of-taxes program that began in 2017. The city has also reduced outstanding payables and deferred charges by $44.8 million and lowered its reported deficit in operations by $1.2 million, according to Medeiros. Continued implementation of recommendations from a October 2018 report by Gov. Phil Murphy’s administration and less reliance on non-traditional state aid also factored into the upgrade.
“Despite these achievements, the city faces continued pressures due to its economic make-up and weak socio-demographics, causing potential revenue uncertainty, particularly in adverse market conditions,” Medeiros wrote. “Atlantic City's ability to implement timely and ongoing structural changes to its operations will continue to be tested over the next several years, even while the state continues to oversee its operations. While economic and budgetary challenges will persist, the city is unlikely to face a near-term credit or payment crisis as its budgetary environment has substantially improved.”
Atlantic City has roughly $365 million of debt outstanding, according to S&P. Medeiros noted that New Jersey commitment to assist Atlantic City through qualified bonds under the state’s intercept program is also an important positive credit factor. While aid is subject to state appropriation and not guaranteed from year to year, Medeiros said that the New Jersey has strong incentive to continue its intervention and support in the near-term.
The press offices for Atlantic City Mayor Marty Small and the state DCA did not immediately respond for comment on the S&P upgrade.