State intervention and a settlement of tax refunds owed to a casino drove a two-notch S&P Global Ratings upgrade of Atlantic City's general obligation debt to CCC from CC.
The rating remains deep within speculative grade. The outlook is developing.
S&P analyst Timothy Little said Tuesday that the upgrade reflected a state takeover of Atlantic City finances that took effect in November that has helped "diminish" the near-term likelihood of a default. A $72 million settlement with the Borgata Hotel Casino & Spa over $165 million in owed tax refunds that saves Atlantic City $93 million also contributed to the city's first S&P upgrade since 1998, according to S&P.
"Obtaining a CCC rating is definitely a step in the right direction," Atlantic City Mayor Donald Guardian said in a statement. "As we continue to implement the recommendations from our fiscal plan submitted last year, and working together with the state, we know that our credit rating will continue to improve higher and higher."
Despite the credit boost, Little cautioned that the city's financial recovery is "tenuous" in the early stages of state intervention with the CCC rating recognizing "weak liquidity" and an "uncertain long-term recovery" Moody's Investors Service rates Atlantic City bonds at Caa3, one notch below the new S&P rating.
Atlantic City has upcoming debt service payments of $675,000 due April 1, $1.6 million May 1, $1.5 million June 1 and $3.5 million for Aug. 1, according to Little. The city and state anticipate making the required payments on time and full, although current and projected cash flow statements have not been provided yet. Little noted that the city's most sizable debt payments are due at the end of the year, including $6.4 million due Nov. 1.
"In our opinion, Atlantic City's obligations remain vulnerable to nonpayment and, in the event of adverse financial or economic conditions, the city is not likely to have the capacity to meet its financial commitment," said Little. "Due to the uncertainty of the city's ability to meet its sizable end-of-year debt service payments, we consider there to be at least a one-in-two likelihood of default over the next year."
Little added that despite the state's increased role with Atlantic City finances, bankruptcy also remains an option for the city if adequate gains aren't made to improve its structural imbalance. He noted that S&P does not consider the city to have a "credible plan" in place to reach long-term financial stability. City officials crafted a five-year recovery plan that centered on selling its former municipal airport property to the Atlantic City Municipal Utility Authority for $110 million to pay off outstanding debt, but the proposal was rejected by the state in early November.
Howard Cure, director of municipal bond credit research at Evercore Wealth Management, said while the credit upgrade reflects the Borgata tax resolution, it emphasized that the city still has a steep climb to retain fiscal health. He said the city's plan to pay for the Borgata settlement by selling $72 million in bonds through New Jersey's Municipal Qualified Bond Act faces some uncertainty due to the state's own budget woes. An additional challenge Cure noted is the state encountering litigation challenges trying to fire municipal workers to achieve necessary savings.
"You really need the cooperation of the city, but also the employees of the city for there to be a real meaningful recovery," said Cure. "This could go bad in a hurry."