Atlantic City, N.J., may turn to Standard & Poor's exclusively to rate an anticipated $140 million tax appeal bond after Moody's Investors Service dropped the city to Ba1, four notches below the S&P rating.
However, by doing so the seaside gambling resort may end up getting a lower rating, because the ratings agencies link tax appeal bonds sold in the New Jersey Qualified Bond Act to the state's credit, and S&P is poised to downgrade New Jersey.
The city is planning to sell up to $140 million of the bonds in the fourth quarter, said Michael Stinson, the city's director of revenue and finance. The proceeds would primarily cover the cost of casinos' successful property tax appeals. As gambling proceeds have declined in recent years in the city, casino owners have filed challenges to their property taxes, claiming that the valuations are too high for the business that can be done.
Many of these casinos' challenges have been successful. Among other things, the new bond will cover an $88 million tax appeal for the Borgata Hotel Casino & Spa for 2011 through 2013 and an additional amount for 2014 that has not yet been determined, Stinson said.
The city plans to use the New Jersey Qualified Bond Act to sell the bond, Stinson said. In this program the state promises to divert a portion of the city's aid to pay the bondholders. As a result, the bond ratings are based on the state's credit.
Moody's rates New Jersey A1 and S&P rates the state the equivalent A-plus. Bonds from issued through the bond act are typically rated A2 by Moody's and the equivalent A by S&P.
However, whereas Moody's has a negative outlook on its state rating, S&P put a negative watch on its rating on June 2. Given that S&P usually resolves its watches within 90 days, its rating of New Jersey may go down in the very near future.
Both Moody's and S&P typically maintain the bond act ratings at a notch below the state GO rating. If S&P were to drop the state's GO rating, it would drop the bond act rating to A-minus, putting its rating one notch below that of Moody's.
Moody's analyst Vito Galluccio, who rates Atlantic City, said Moody's might not give a rating just one notch below the state's rating.
"If an issuer is not able to cover its [New Jersey bond act] debt service with a minimum state aid coverage of 1.5 times, we would consider notching the sale by more than one notch," Galluccio said. "Further, if the city's state aid coverage does not exceed at least a one times coverage of [bond act] debt service, it would not qualify for our enhanced rating at all."
In an interview Wednesday, Stinson said the city didn't agree with Moody's on its rating of the city's GO debt. Given Moody's downgrade of the city in July, the city is inclined to not pay them to rate the upcoming issue, Stinson said.
Stinson said the city planned to just use S&P to rate the city. S&P currently rates the city's GO debt at A-minus.
City officials will meet with S&P professionals in two weeks, Stinson said. He said he expects S&P will downgrade the city at that point.
With relatively weak underlying credit grades, the city shouldn't be shopping for ratings, said Merritt Research Services, LLC president Richard Ciccarone. He said it would be better to have two ratings.
"In selecting or choosing an agency to rate a bond issue, the City of Atlantic City is doing exactly the same process that all other bond issuers do each time they issue bonds," Stinson said in an email. "I do not consider this evaluation process a 'shopping' process. Since 2010, the City of Atlantic City has only had one agency rate its bond issues."
As an investor Ciccarone said he'd want to look at underlying credit quality when the bond is being supported by a state intercept program, particularly in a situation like the current one where the state is on a credit slide. The quality of the underlying credit could become important in the bond's pricing.
Evercore Wealth Management LLC director of municipal research Howard Cure said the city is suffering the consequences of a having concentrated tax base in which "aggressive, sophisticated corporations that are more than willing to challenge their property tax assessments."
He said the use of proceeds to pay for property tax appeals is itself a credit negative.
Galluccio agreed: "Typical municipal debt proceeds are used by cities to fund tangible productive assets to be used for services to residents over the course of 10, 20 or 30 years into the future, such as buildings, streets and sidewalks and public safety infrastructure. The proceeds of these tax appeal bonds are unique in that they're being used to refund large taxpayers (the casinos) for money that has already been spent by the city in previous years. This can be viewed as a form of deficit financing and we consider it to be a credit negative for Atlantic City's general obligation credit profile."
Galluccio also said, "with this planned $140 million issuance [Atlantic City] is projected to have a debt burden over 2.5% of equalized value at the end of 2014. That ratio is more than twice as high as our national local government median debt burden of 1%."
In other bond rating news related to Atlantic City, on Wednesday afternoon Moody's put on review for a downgrade the Baa3 ratings of series 2005 New Jersey Casino Reinvestment Development Authority's parking fee and IAT revenue bonds and series 2004 New Jersey Casino Reinvestment Development Authority hotel fee revenue bonds. The bonds draw their revenues from Atlantic City parking lot, hotel, and gaming revenue. The two series have a total debt outstanding of $261 million, according to Moody's.
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Corrected August 28, 2014 at 1:05PM: An earlier version had an inaccurate headline.