Financial recovery spurs credit boost for Atlantic City agencies

Atlantic City’s recent fiscal progress under state control provided a credit boost for two municipal issuers tied to the Jersey Shore gambling hub.

Moody’s Investors Service upgraded the junk rating on the Atlantic City Municipal Utilities Authority’s water revenue debt two notches to Ba1 from Ba3 last week citing the city’s improved credit profile and diminished chances now of the MUA dissolving or an “unfavorable monetization” materializing. The utility’s credit outlook was revised to stable from positive.

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Atlantic City's Casino Reinvestment Development Authority also received a credit lift last week when Moody’s revised the CRDA’s Baa2-rated luxury tax revenue bonds to positive from stable thanks to a strengthening gaming sector expected to generate improved debt service coverage. Moody’s concurrently affirmed the CRDA’s junk-rated hotel room fee revenue bonds at Ba2 with a stable outlook and parking fee revenue bonds at Ba3 with a negative outlook.

Moody’s took action on the MUA and CRDA bonds on heels of upgrading Atlantic City’s general obligation bonds two notches on Jan. 2 to Ba3 from B2 citing improved finances under a five-year state intervention program that took effect in November 2016. The Ba3 rating, which is three levels below investment grade, is six notches above where Moody’s rated Atlantic City debt from April 2016 to November 2018.

Moody’s analyst Doug Goldmacher noted in a Jan. 9 report that while previous efforts to dissolve the MUA have been halted, the water authority remains “highly pressured” due to its governance connection to Atlantic City. Goldmacher noted that while Atlantic City has made material financial progress, weaknesses remain which keeps a future monetization of the MUA in play.

“Viewed strictly as a utility, the authority is relatively small but healthy,” Goldmacher wrote. “Future development with the city's finances will have a major impact on the likelihood of a future monetization and will, therefore, have a material impact on the authority's future ratings.”

New Jersey opted not to sell or lease the MUA in December 2017 for addressing Atlantic City’s debt crisis as part of its powers under the Municipal Stabilization and Recovery Act after receiving vocal opposition from residents. A year earlier the state rejected an Atlantic City financial recovery plan that would have involved selling its former municipal airport, Bader Field, to the MUA for $110 million, which Goldmacher noted is 6.6 times larger than the authority’s outstanding debt.

Despite signs of recovery in Atlantic City, Goldmacher said the MUA’s customer base will remain pressured since the gaming industry remains diminished from its pre-recession peak following five casino closures between 2014 and 2016 before two were added in 2018. Casinos contribute roughly 40% of the MUA’s $15.6 million of annual revenues.

“Despite the authority's challenging customer base, the system itself is healthy,” Goldmacher said. “The authority's finances should remain satisfactory in the near to medium term as management continues to budget conservatively and actively manage rates to preserve financial health.”

The CRDA’s luxury bonds are secured by a senior lien on gross revenues from luxury taxes levied from a 9% tax on hotel rooms, 3% tax on alcohol by the drink and a 9% tax on entertainment within Atlantic City boundaries. Goldmacher noted that these revenue streams are all dependent on Atlantic City’s tourism base, but are not exclusively tied to casinos. The entertainment tax applies to tickets to theaters, exhibitions and other places of amusement.

New Jersey established the CRDA in 1984 to collect and distribute certain taxes and fees paid by Atlantic City casinos for city development projects throughout the state. After 2011, changes were made so that all available revenues and assets were directed by statute for investment in the Atlantic City tourism district.