State government credit support will bring Atlantic City's coming taxable bond sale up to investment grade.
Moody’s Investors Service assigned a Baa1 rating with a stable outlook to the up to $55 million taxable transaction because of enhancement by New Jersey’s Municipal Qualified Bond Act program. Moody's puts the MQBA program one notch below New Jersey’s A3 rating. The deal's proceeds will fund deferred pension and healthcare contributions.
“The stable outlook on the Municipal Qualified Bond Program enhanced debt matches the state's stable outlook, which reflects that the current A3 rating of the state is well positioned for the near term due to solid economic performance and the expectation that any fiscal 2018 budget gaps will remain manageable,” said Moody's analyst Douglas Goldmacher in a March 26 report. “However, in the longer term, the state's credit profile will continue to weaken as large long-term liabilities grow and the state's budget is challenged by growing pension contributions in a low revenue growth environment.”
The series 2018A bonds, which Morgan Stanley is slated to price April 5, will fund $37.7 million of pension and healthcare payments Atlantic City received state approval to defer in 2015 while facing a $101 million budget shortfall. The cash-strapped city owes around $47 million along with a 10% interest cost for these obligations by the year.
In addition to the MQBA program, Atlantic City is backing the bonds with Investment Alternative Tax revenue, which is derived from taxes on gambling revenues. The IAT revenues are directed to pay down city debt or debt service payments under New Jersey’s Atlantic City takeover that took effect in November 2016.
“This money will be accumulated and, if sufficient, will be used to pay debt service in place of state aid or other revenue sources,” said Goldmacher. “This extra security in no fashion interferes with the fundamental MQBA structure which remains in place.”
Details on maturities for the upcoming bond sale have not been determined yet, according to city officials. The city is expected to have just under $400 million in outstanding bond debt after the transaction.
Moody’s assigns Atlantic City its speculative grade Caa3 long-term issuer rating, with a positive outlook. S&P Global Ratings rates Atlantic City bonds CCC-plus.