Atlantic City hit the bond market for the first time since a late 2016 state takeover Wednesday with a $71.3 million deal to fund its recent tax settlement with the Borgata casino.
The cash-strapped city issued the tax-appeal refunding bonds though New Jersey’s Municipal Qualified Bond Act for a $72 million settlement reached in February on $165 million owed to the Borgata in tax appeals from 2009 to 2015.
The deal, insured by Build America Mutual, was priced by Morgan Stanley at yields ranging from 2% in 2020 to 3.96% in 2042, according to Thomson Reuters. The BAM wrap provided the bonds a AA rating with a stable outlook from S&P Global Ratings; the deal also carried underlying ratings of BBB-plus from S&P and Baa1 from Moody's Investors Service.
Atlantic City last accessed the capital markets in May 2015 through the state’s credit enhancement program to pay off an emergency $40 million loan and retire $12 million of maturing bond anticipation notes. The $41 million taxable general obligation bond sale, which was not insured, featured a high penalty after Bank of America Merrill Lynch priced the bonds to yield at 7.25% in 2028 and 7.75% in 2045.
“The Municipal Qualified Bond Act is a good example of the kind of action a state can take to assist cities and towns facing fiscal stress,” said Suzanne Finnegan, BAM’s chief credit officer. “The strong legal protections for investors offered under the MQBA make these bonds a solid investment-grade credit, and we were pleased that adding BAM’s guaranty helped the transaction price smoothly and at the lowest cost to the City.”
Atlantic City has issued roughly $400 million of bonds since 2007 with the most issuance occurring in 2012 when it sold $114.2 million of debt. The city did not come to market in 2014 or 2016.
Howard Cure, director of municipal bond credit research at Evercore Wealth Management, said Wednesday’s deal drew investor interest due largely to New Jersey’s active intervention efforts with Atlantic City since November combined with the bonds being insured and falling under the state intercept program. The state’s Local Finance Board took over city finances on Nov. 9 through the Municipal Stabilization and Recovery Act approved by New Jersey lawmakers with power to alter outstanding debt and municipal contracts. The city's newly adopted budget featured $35.3 million in cuts.
“It looks like at least in the short term that the city has stabilized,” said Cure. “They aren’t bleeding casino revenue losses like they used to and seem to have a plan to increase revenues.”
Atlantic City is slated to receive $41.3 million in MQBA revenues under Gov. Chris Christie’s proposed fiscal 2018 budget. This state support equates to nearly four times the combined annual debt service Atlantic City needs to pay for the new bonds and its 2015 deal, according to BAM.
The press office for Atlantic City Mayor Donald Guardian did not immediately respond for comment on Wednesday’s bond sale. The city has $224 million of bonded debt tied largely to casino property tax appeals with deep junk level bond ratings of CCC by S&P and Caa3 by Moody’s Investors Service. The city paid $36.8 million of debt service in 2016, according to Moody’s.
The Christie administration was happy to take credit.
“Because of the State’s steady hand in managing Atlantic City finances, the City was able to obtain bond insurance and access the capital markets such that the debt was sold quickly and at a low interest rate given the City’s underlying credit," Jeffrey S. Chiesa, the state designee leading the financial recovery effort for Atlantic City, said in a statement.