Atlantic City's junk-level bond rating fell further Monday, when Moody's Investors Service downgraded it two notches to Caa3 amid continuing default concerns.
Moody's analyst Josellyn Yousef said the downgrade from Caa1 reflects an expected loss to bondholders of up to 35% of principal due to "a very large structural deficit" with limited relief sources outside of state assistance.
The Caa3 rating is on par with Standard & Poor's, which cut Atlantic City's bond rating four notches to CCC-minus in January. This rating category is defined as "extremely weak credit quality and subject to very high credit risk", according to Janney Capital Markets.
"The downgrade to Caa3 reflects the greater likelihood of default within the next year and higher probability of significant bondholder impairment given an ongoing political stalemate over an Atlantic City fiscal rescue package," said Yousef in her report. "The downgrade also incorporates renewed signals from the state that bondholders will face losses as part of a possible debt restructuring."
Moody's maintained its negative outlook, citing "near-term service insolvency" facing the Jersey Shore casino destination. Yousef said the city's bond rating could be raised if New Jersey lawmakers adopt legislation that increases revenues and "materially reduces" its deficit. She added that the state giving an indication that bondholders will be paid in full even as fiscal recovery legislation is pending could also lead to an upgrade.
The press office for Atlantic City Mayor Donald Guardian did not immediately respond for comment on the Moody's downgrade. Mayor Guardian has said that "non-essential" government services will need to be shut down for at least three weeks starting Friday so the city can pay county taxes and make a $600,000 debt service payment. Moody's has estimated the city has a $102 million budget deficit on top of more than $400 million in debt outstanding.
State lawmakers have been grappling over a rescue package for Atlantic City that would avoid a default or bankruptcy.
Gov. Chris Christie is pushing for a state intervention plan that would empower New Jersey's Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years, which is opposed by Mayor Guardian and Assembly Speaker Vincent Prieto, D-Secaucus.
Christie has said he will not support a companion bill allowing casinos to make payments in lieu of taxes for 10 years including $30 million collectively for 2016 without state takeover approval.