Financial hits to Atlantic City's hospitality industry from state limitations aimed at curbing the spread of COVID-19 are hindering a state agency reliant on luxury tax revenues to pay debt service on outstanding bonds.
While Atlantic City casinos have reopened at reduced levels after being shut down from March 17 to July 3, luxury tax revenue collections backing bonds issued by the Casino Reinvestment Development Authority continue to struggle and will remain pressured, said Fitch Ratings analyst Douglas Offerman. Besides the 25% occupancy limit on casinos, the lack of conventions, meetings and concerts that help draw visitors to gaming properties, impede earnings.
“Their revenues are tied more to hotels and entertainment, but at the end of the day the attraction of much of that activity is the casinos,” Offerman said. “The headwinds are across multiple factors including the public health crisis and the possibility of renewed restrictions.”
Fitch downgraded the CRDA’s roughly $220 million of luxury tax revenue bonds one notch to BBB from BBB-plus on Friday, and maintained the negative outlook, citing a severe decline in pledged revenues in 2020, and likely continued near-term struggles. The downgrade occurred nearly seven months after Fitch
CRDA bonds are special limited obligations of the agency secured by luxury tax receipts levied in Atlantic City and collected by the state of New Jersey. The pledged revenues consist of a 9% hotel room tax, 9% tax on ticket purchases at theaters, exhibitions and other entertainment venues along with a 3% tax for on-premises alcoholic beverage consumption.
The lowered rating is on par with Moody’s Investors Service, which rates the state agency’s debt at Baa2 with a stable outlook. S&P rates the CRDA one notch higher at BBB-plus with a negative outlook.
Moody’s analyst Douglas Goldmacher said how quickly casinos are permitted to increase capacity and how much volume they draw in the coming months will determine whether his agency will downgrade the CRDA bonds.
“Capacity is a huge factor and if [limits] start to become perpetual, it will have long-term consequences,” he said. “If the capacity constraints stay in place for a long enough period of time it does have a negative impact on the revenue streams going to these bonds.”
S&P credit analyst David Hitchcock said he needs more information regarding hotel visits before determining whether to downgrade the CRDA.
The CRDA was established in 1984 as a state agency to collect and distribute certain taxes and fees paid by Atlantic City casinos for development projects. New Jersey redirected the state’s casino investment alternative tax from the CRDA toward Atlantic City debt service under a five-year state takeover of the gambling hub that took effect in November 2016.
Atlantic City Mayor Marty Small did not immediately return a request for comment..
Thomas Forkin, who is
"We have to implore the governor to open up Atlantic City," Forkin said. "That needs to happen in short order for these casinos and other venues to survive in the winter."
The estimated $9.9 million luxury tax revenues collected by the CRDA through August were about 66% below the same period in 2019, Offerman said. August revenues, following the reopening of casinos, were 31% below 2019 levels, he said.
Fitch forecasts casino revenues in 2021 will fall around 10% below 2019 levels. Gaming receipts may shift further toward online options, Offerman said, which would signal a potentially slower recovery for on-site activity that supports luxury taxes.
“To the extent that online activity replaces visits to Atlantic City and taxable activity in Atlantic City, then that is a negative for bondholders,” he said. “It is too soon to know if the shift to online gaming is going to be sustained over time or whether it is an outgrowth of the pandemic that will eventually shift back to in-person gaming options.”
The CRDA press office did not immediately respond for comment on the Fitch downgrade or projections for luxury tax revenues.
