Aug. 13 (Bloomberg) -- The shuttering next month of Revel, the $2.6 billion hotel and casino that was meant to usher in a new era of opulence in Atlantic City when it opened in 2012, is set to quicken the seaside community’s downward spiral.
Five years after the longest recession since the 1930s, hotel rooms sit vacant and revenue keeps falling in what was once the second-largest U.S. casino market. New Jersey Governor Chris Christie’s turnaround plan for the municipality, begun in 2011 and hinged on Revel’s success, hasn’t delivered, prompting Moody’s Investors Service to cut the city’s $245 million of general-obligation debt to junk last month.
Moody’s pins the city’s struggle mostly on its dependence on one industry. About 70 percent of taxes come from casinos, whose revenue has slid for seven straight years as competition from neighboring states intensifies. While Las Vegas has rebounded, drawing tourists with conventions and restaurants, Atlantic City remains largely a place for gambling day-trippers.
The demise of Revel is “more confirmation that they’re headed in the wrong direction,” said Matt Dalton, chief executive officer of White Plains, New York-based Belle Haven Investments, which manages about $2 billion of municipal bonds. “They don’t have the money to spend on what it’s really going to take to rejuvenate that area and bring people in.”
Revel, Atlantic City’s newest casino, said yesterday that it will close by Sept. 10 after failing to find a buyer in bankruptcy. It joins The Atlantic Club, which closed in January; and the planned shutting of Caesars’ Showboat on Aug. 31 and Trump Plaza Hotel & Casino Sept. 16. The moves affect 7,800 employees.
The closings would leave the city with eight gambling houses, down from as many as 12, and may increase the jobless rate from June’s 13.1 percent level, about double the state average. Gambling venues account for almost half the city’s jobs: 5,883 positions in a workforce of 13,500.
“This might be Revel’s last chapter, but not the last one for this building,” Mayor Don Guardian said in a statement yesterday. “My administration remains committed to the workers, the businesses, and the visitors who are impacted by” the decision on Revel.
Atlantic City was a decaying resort until New Jersey legalized casino gambling in 1976 and limited it to that location. The first casino, Resorts International, opened in 1978. Revenue peaked above $5 billion in 2006.
The community of about 40,000 has since seen its casino-generated revenue decline. In 2012, it dropped to become the third-largest U.S. gambling market after Nevada and Pennsylvania. Atlantic City casino revenue fell 6.2 percent to $2.9 billion in 2013, and is down 6.4 percent this year.
Though Nevada gambling also took a hit from the recession, revenue has risen annually since 2010. Gambling accounts for 78 percent of revenue generated in Atlantic City, compared with 34 percent in Las Vegas, according to Moody’s figures.
“You want the casinos to be an accoutrement, not the main stuff,” said John Mousseau, director of fixed income at Cumberland Advisors, which manages $2.9 billion from Vineland, New Jersey. “They’ve got a bad business model in terms of everything being based on the casinos.”
Guardian, 61, who was elected in November, has sought to reverse the slump by championing conventions, the arts and gay tourists. He lauded Las Vegas’s efforts at diversification.
“In Atlantic City, we unfortunately didn’t take that same opportunity,” he said in an interview. “We hit bottom and now we have to realize that we’re re-growing, and gaming is just going to be one part of our future.”
Christie, 51, a second-term Republican who took office in 2010, pledged $261 million in tax incentives to hasten Revel’s completion. He initiated a five-year plan to turn around Atlantic City that included marketing to increase non-gambling tourism. The state in November also began letting casinos offer online betting. Revenue hasn’t met forecasts.
Kevin Roberts, a spokesman for Christie, didn’t return e-mails seeking comment on Atlantic City and Revel.
This year, the U.S. Supreme Court rejected an appeal of a court ruling that said New Jersey’s law legalizing sports gambling conflicted with federal statutes. The Democratic-led legislature sent Christie a bill to repeal state prohibitions against wagering. He vetoed it last week, saying federal law was “sacrosanct.”
Dalton at Belle Haven said the addition of casinos in nearby states has hurt.
“It’s a declining credit,” he said. “If you close your eyes you can kind of liken it to Detroit. The business model in Atlantic City is under that much stress.”
Like Detroit, which filed a record municipal bankruptcy last year, declining revenue for Atlantic City’s key industry means less money to pay bills, said Dalton. He said his firm deals with only insured bonds from Atlantic City.
Moody’s cut Atlantic City to Ba1, the highest speculative grade, with a negative outlook, citing competition from regional gambling venues and the financial strain of closing casinos and tax appeals. The company rates Las Vegas eight steps higher at Aa2.
Atlantic City’s population has remained at about its current level since 1980 while Las Vegas’s has more than tripled, Moody’s said. About 30 percent of Atlantic City residents live in poverty, compared with 13 percent in Las Vegas, according to Moody’s.
Investors in the $3.7 trillion municipal-bond market demand extra yield on Atlantic City debt. Tax-exempt general obligations maturing in December 2027 traded yesterday at an average yield of 4.8 percent, data compiled by Bloomberg show. That’s about 2.6 percentage points more than benchmark munis.
With the Revel closure, Atlantic City will lose its second-largest taxpayer. The complex’s $19 million property-tax bill this year accounts for 7.5 percent of the city’s revenue, Moody’s said today in a statement. The ratings firm deemed the closing a credit negative for the city, though it didn’t revise its rating or outlook.
Atlantic City’s Republican mayor cited increasing choices for retail and dining, the construction of a convention center next to Harrah’s casino and expanding service at the local airport. Restaurants including Guy Fieri’s Chophouse at Bally’s and Martorano’s at Harrah’s opened this summer.
Non-gaming revenue, including from hotels, entertainment and food and beverages, has risen by more than $160 million in the last two years and is approaching $1 billion annually, John Palmieri, executive director of the Casino Reinvestment Development Authority, said in a statement.
The authority is a state panel that oversees the use of casino money for community and economic development.
“If we’d done this 10 years ago, we wouldn’t even be having this conversation,” Guardian said. “We still have over $2 billion a year in gaming. It’s not the $5 billion it was. But at some point, newer casinos are not going to be able to sustain themselves in Pennsylvania, Delaware and Maryland.”
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