Standard & Poor's dropped Atlantic City, N.J. to a junk-bond rating with a four-notch downgrade late Tuesday.
The rating falls to BB from BBB-plus; Standard & Poor's also placed the rating on credit watch with negative implications.
The downgrade comes five days after New Jersey Gov. Chris Christie issued an executive order appointing corporate restructuring attorney Kevin Lavin from FTI Consulting as an emergency manager to oversee Atlantic City's finances and daily operations. The Republican governor also named Kevyn Orr, who was Detroit's emergency manager during its recent Chapter 9 bankruptcy process, as a part-time consultant.
Standard & Poor's follows Moody's Investors Service in downgrading the faded casino resort, but a significant split continues in their ratings.
Moody's Friday downgraded Atlantic City's general obligation debt to Caa1 from an already junk-bond level Ba1.
S&P analysts Lindsay Wilhelm and Karl Jacob said the agency is concerned that Christie's order "providing explicit authority to use any and all lawful means" to recommend a plan within 60 days to stabilize Atlantic City's finances includes the possibility of restructuring debt.
"The implementation of an emergency manager signals to Standard & Poor's that the state does not view the city as capable of resolving its challenges without outside intervention," said Wilhelm in a statement. "In our view, third-party intervention is often more draconian than the actions taken to date and has a greater likelihood of being detrimental to bondholders."
Atlantic City Revenue Director Michael Stinson expressed disappointment at the S&P action saying the emergency manager setup deserves more of a chance to work and five bills pending in the state legislature could also provide a financial boost.
"I think the action Standard & Poor's took was overly aggressive on the downward side," said Stinson. "We're very disappointed."
Wilhelm and Jacob also emphasized that Christie's decision to tap an emergency manager and consultant "with significant experience in corporate and municipal bankruptcy" raises concerns that whatever plan is created will include scenarios that would lead to a non-payment of the city's bond debt.
The city's rating could get lowered into the C category if the emergency manager plan includes a potential bankruptcy declaration or debt restructuring is "inconsistent with the terms of the outstanding obligations," said Wilhelm and Jacob. Other concerns raised include weak liquidity from "heightened market access risk" due to the emergency manager appointment and weak budget flexibility.
Some Atlantic City GO and tax appeal refunding bonds are trading lower, according to data from the Municipal Securities Rulemaking Board's EMMA website.
