Atlantic City Casino Tax Refunds Increase Borrowing Costs
Atlantic City’s borrowing costs have risen as much as 21 percent since 2012 as the New Jersey gambling resort increases debt to refund property-tax bills appealed by casinos struggling with a seven-year business slump.
Investors in the $3.7 trillion municipal market are punishing Atlantic City as gambling revenue slides amid competition from nearby states. New Jersey is three years into Governor Chris Christie’s five-year plan to turn around the oceanside city, which is showing few signs of recovery, even as the state legalizes Internet wagering.
Atlantic City saw the extra yield buyers demand on part of a $62.9 million bond sale last week increase from an issue in December 2012, according to data compiled by Bloomberg. Moody’s Investors Service cut the municipality’s credit rating to Baa2, two steps above junk, saying falling casino revenue and ongoing tax appeals will “further strain the city’s weak financial position and increase its debt burden to above-average levels.”
“They trade with a bit of a taint because of the credit direction,” said Paul Brennan, who helps manage $90 billion of munis, including $1 billion in New Jersey-focused mutual funds, at Chicago-based Nuveen Asset Management. “If the appeals continue, and the gaming industry continues to be sluggish, the revenue growth is going to be sluggish or possibly negative.”
Atlantic City had $219 million of debt before last week’s sale, when it sold $14.7 million for capital improvements. It also offered $52.1 million to finance court-approved tax refunds owed to three companies, including $49.5 million to casino owner Tropicana Atlantic City Corp., bond documents show.
In October, a state court ordered Atlantic City to pay the Borgata casino, its largest, $49.8 million to settle a tax appeal driven by the gambling decline. The city, with $2.7 million of reserves for fiscal 2013, “has limited internal resources to pay the refund, which totals 20 percent of its annual revenues,” Moody’s analyst Vito Galluccio said in an Oct. 24 report.
“Atlantic City will likely resort to issuing debt, as it has had to do to pay refunds to other casinos in recent years,” Galluccio said.
Christie, a Republican and potential 2016 presidential candidate, has called Atlantic City’s recovery key to New Jersey’s economic rebound. He created a tourism district around the resorts to give the state a greater role in policing and development, and promised Revel Entertainment Group LLC, the city’s first new casino in nine years, $261 million of tax credits if it earned a profit.
Revel filed for Chapter 11 bankruptcy protection in March, 11 months after the $2.6 billion casino opened. The company said last month it’s exploring strategic options, such as a possible sale, and restructuring its loans.
Christie has rejected a legislative proposal to end Atlantic City’s monopoly on gambling in the state and allow casinos at the Meadowlands Racetrack in East Rutherford, across the Hudson River from Manhattan.
“We’re three years into it now and I said thereafter, we could reopen the discussion” about expanding gaming elsewhere, Christie said Nov. 25 during his monthly radio show.
New Jersey approved casinos in 1976 and limited them to Atlantic City. Gambling revenue rose every year until 2007, when the 18-month recession began, and after neighbors, including Pennsylvania and New York, expanded gambling.
Last year, Atlantic City lost its title to Pennsylvania as the second-biggest U.S. gambling market, behind Las Vegas. New Jersey’s casino revenue dropped to about $3 billion, from a record $5.2 billion in 2006.
In the first ten months of this year, casinos won $2.4 billion, a decrease of 8.3 percent from the same period of 2012. For the full year, they are expected to generate less than $3 billion in casino gross revenue, partly because of Hurricane Sandy, according to data compiled by Bloomberg Industries. That would be their worst year in more than two decades. Casinos pay 70 percent of the city’s taxes.
In last week’s bond sale, the extra yield on debt due in seven years rose 13 percent compared to that demanded of securities of the same maturity sold in December 2012, data compiled by Bloomberg show. The risk premium was as much as 21 percent higher for nine-year maturities, the data show.
Debt maturing in 2022 was priced to yield 3.92 percent, 1.22 percentage points above 9-year benchmark munis and 1.13 percentage points over debt from New Jersey issuers, according to data compiled by Bloomberg. Those maturing in 2023 were priced to yield 4.16 percent, 1.27 percentage points above 10-year benchmark munis and 1.13 percentage points over debt from state issuers, the data show.
Christie, 51, is counting on Internet gambling to help the casinos. New Jersey last month became the most-populous state to legalize online betting.
The governor has forecast revenue from online games to exceed $1 billion in 2014, which would generate $150 million for the state based on the 15 percent tax on winnings. His estimate is more than double the $435 million forecast by Bloomberg Industries.
Don Guardian, the mayor-elect of Atlantic City, said he wants to help the city clean up and attract more non-gaming tourism and business conventions. The Republican in November ousted incumbent Lorenzo Langford, a Democrat who feuded with Christie over his takeover plan.
“The chapter of casinos as a monopoly in Atlantic City is over,” Guardian, 60, told reporters on Nov. 20 at a political convention there. “Atlantic City can and should be the financial incubator for this part of the state.”
Past efforts to attract conventions and other tourism was hampered as the nearest airport with major carriers was about 60 miles (97 kilometers) away in Philadelphia. United Airlines said last month it would begin offering non-stop flights to Atlantic City’s airport in April from Chicago and Houston.
Christie also is fighting to bring sports betting to Atlantic City. Last month, a federal appeals court denied the state’s request for another hearing to challenge a U.S. law that bans wagering on professional and collegiate sporting events in 46 states, including New Jersey. The governor plans to take the case to the U.S. Supreme Court, said Colin Reed, a spokesman.
State Senate President Stephen Sweeney, a Democrat, said he and Christie won’t let Atlantic City “become Detroit,” which filed the largest U.S. municipal bankruptcy in July. New Jersey laws allow the state to intervene in municipal finances.
Issuers from New York to California are offering about $10.8 billion in long-term debt this week, the biggest supply wave since April, data compiled by Bloomberg show. Last week states and cities sold just $590 million as the market was closed Nov. 28 for the U.S. Thanksgiving Day holiday.
Municipalities are issuing after the local-debt market declined 0.2 percent in November, the worst losses for the month since 2010, Bank of America Merrill Lynch data show.
Benchmark yields have increased for four straight weeks, the longest stretch since June, Bloomberg data show. The interest rate on AAA 10-year munis is 2.88 percent, close to the highest since September. That compares with a 2.75 percent yield on similar-maturity U.S. Treasuries.
The ratio of the yields, a gauge of relative value, is about 105 percent. It compares with an average of 94 percent since 2001. The larger the number, the cheaper munis are compared with federal securities.
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