- Investors expect state to reject plan with any debt losses
- Former emergency manager decided against extending maturities
Atlantic City is crafting a recovery plan to prevent New Jersey from taking over the distressed seaside gambling hub. Bondholders are betting it won’t entail default.
Local officials have tapped three firms for a financial blueprint that must be approved in November or the state can assume unprecedented control over the city’s finances. Mayor Don Guardian has said he wants to cut Atlantic City’s debt service, which totals about $37 million this year, or about 15 percent of its budget.
To avoid setting an unwelcome precedent, New Jersey, which last experienced a local default in the 1930s, won’t approve any plan that hurts owners of the city’s debt obligations, according to Dan Belcher, a senior municipal analyst at ColumbiaThreadneedle Investment Advisers.
"The market would be watching this closely because it could be viewed negatively if they allowed them to impair bondholders," said Belcher, whose firm manages $26 billion in municipals, including Atlantic City general obligations. "It could potentially happen with other distressed municipalities in New Jersey."
Risks loom in Atlantic City, which has been veering toward insolvency since a third of its 12 betting parlors closed in 2014. State lawmakers in May pulled it from the brink of bankruptcy by providing enough cash to pay its bills this year. A delay in that loan led Moody’s Investors Service to warn of the potential for bond defaults before the city and state finalized the terms last week.
Kevin Lavin, who was appointed by Republican Governor Chris Christie to serve as the community’s emergency manager last year, said by telephone that he explored extending principal payments on bonds guaranteed by insurers before determining it wouldn’t provide much breathing room to the city.
His last report issued as he exited his post in January recommended that the municipality take control of its water system, regionalize police services and consider privatizing the fire department. The city will take steps to dissolve the water authority as among the conditions for the $73 million loan, Guardian said Tuesday.
"There is no need to have any bondholder losses,” Lavin said. "The city’s got more than enough wherewithal to take care of all the debt that they’ve incurred and to fix itself. It’s just a matter of having guys make the right decisions."
Guardian said Friday that PFM Group, a financial advisory and consulting firm that has helped turn around Pittsburgh and other municipalities, will lead the work on a balanced budget and five-year plan to stabilize the city’s finances. McManimon, Scotland & Baumann LLC will provide legal advice on any debt restructuring, and NW Financial Group, a New Jersey financial adviser, will assist with redesigning the city’s debt service and discussions with bondholders and insurers.
Michael Nadol, a managing director at PFM, said the team will build on previous analysis and hopes to have a "pretty good sense of the direction" for the plan about a month before it’s submitted Nov. 3.
Brian Murray, a spokesman for Christie, referred questions to the state’s Department of Community Affairs, which declined to comment. Christie had earlier questioned the city’s ability to come up with a plan.
In a presentation to residents on July 26, Guardian said he would like to cut annual debt service by $16 million. Atlantic City has about $240 million in outstanding securities.
Carl Thompson, a municipal analyst in Boston at Eaton Vance, said he doubted the city could refinance its debt, given recent trades.
Taxable securities sold last year, despite providing more security to investors by diverting state aid to payments, still had to be sold at yields as high as 7.75 percent, junk bond levels.
Under the May legislation, the state can step in and implement actions such as selling municipal assets and breaking union contracts if the plan doesn’t pass muster. There was no criteria for approval -- giving the New Jersey officials a lot of leeway to decide to assume control, said Thompson, whose firm owns city bonds among its $34.8 billion in local debt.
"Having the state involved likely opens more avenues to recovery than would be available to the city alone,” Thompson said.