Legislation signed on Aug. 10 by New Jersey Gov. Chris Christie creating a statutory lien on appropriated state aid for bonds issued by the Municipal Qualified Bond Act is a credit positive for bondholders in the Garden State, according to Moody's Investors Service.

Moody's analyst David Strungis said in a Aug. 20 report that the statutory lien helps clarify that MQBA bondholders can expect to receive the full amount of qualified state aid even in the case of an enhanced issuer filing for bankruptcy. Enhanced issuers in the Garden State include Atlantic City, Irvington, Newark, Paterson and Trenton. Moody's isn't expecting any ratings challenges to result from the statutory lien. New Jersey municipalities must receive permission from the state Local Finance Board to qualify for the MQBA program.

Strungis said the lien is timely for Atlantic City after the financially struggling city issued $53.76 million of MQBA-enhanced bonds in June. The gambling hub has received $16.3 million in qualified revenue subject to the MQBA intercept this year providing three times maximum annual qualified debt service coverage on its current enhanced bond. The city, which is rated Caa1 by Moody's with a negative outlook, faces bankruptcy risks despite making its August debt service payment, and has been under emergency manager control since late January.

Moody's said the MQBA enhancement has never been tested in bankruptcy, though the treatment of Detroit's distributable state aid bonds provides a glimpse of how the program may be treated in bankruptcy.

"The DSA bonds were never impaired throughout the Chapter 9 process, unlike other debt paid from Detroit's own tax revenues, which saw recoveries of as little as than 12 cents on the dollar," said Strungis.  "The DSA bonds are also paid directly from state aid pledged to bondholders."

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