A resolution to millions of dollars in outstanding casino tax appeals moved Atlantic City's rating slightly higher, though it remains well in junk bond territory.
S&P Global Ratings raised Atlantic City’s debt one notch to CCC-plus from CCC, assigning a stable outlook, citing improved finances and timely debt service payments. The distressed Jersey Shore gambling hub, which has been under state intervention since November, received a two-notch upgrade by S&P in March weeks after a $72 million settlement on $165 million of owed tax refunds to the Borgata Hotel Casino & Spa.
"The upgrade and stable outlook reflect our opinion of the city's improving financial performance and settlement of significant unfunded tax appeals," said S&P credit analyst Timothy Little. "Additionally, while current and projected cash flow statements have not been provided, the city and state have indicated they will continue to make debt service payments on time and in full, including $6.4 million due by Nov. 1 of this year."
Little noted that after the Borgata settlement, Atlantic City successfully settled on $67 million of $137 million in casino tax appeals owed to Bally’s, Caesars, Golden Nugget, Harrah’s, Tropicana, the former Taj Mahal and the former Trump Plaza, paid for through bonds issued under New Jersey's credit enhancement program. The city is also benefiting from implementation of a 10-year payment-in-lieu of taxes program for casino properties that began in the 2017 fiscal year and an adopted budget of $221.1 million that is 14.6% less than a year ago. He said the city is now unlikely to face a “near term credit or payment crisis” in the next 12 months.
While recent fiscal progress has been achieved under control of New Jersey’s Department of Community Affairs, Little cautioned that default risks remain until Atlantic City can prove it can align revenues and expenses and create improved cash balances. He said the city also faces legal uncertainty on how it can implement operational changes while under state takeover and risks of future casino closures due to increased regional competition from nearby gaming facilities.
"In our opinion, payment of the city's obligations remains vulnerable and is dependent upon favorable business, financial, and economic conditions," Little said. "Despite the settlement of unfunded tax appeals financed through the state Qualified Bond Act program, the issuer's financial commitments appear to be unsustainable in the long-term until payment of its obligations occurs during a prolonged period of sustained structural balances and improved liquidity.”
The press office for Atlantic City Mayor Donald Guardian did not immediately respond for comment on the S&P upgrade. Moody’s Investors Service rates Atlantic City general obligation bonds at Caa3, two notches below the new S&P rating.
“While the City faces ongoing challenges, the work being done by the State to stabilize the City’s finances has thus far demonstrated to an independent rating agency that Atlantic City is moving in the right direction,” DCA spokeswoman Tammori Petty said in a statement. “However, there remains more work to be done and we cannot lose sight of the fact that the City’s operating budget will be hampered by structural challenges that started many years ago and will take significant time to fix.”
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Updated October 18, 2017 at 11:37AM: Story was revised to include a comment from the Department of Community Affairs.