Atlantic City Poised to Diminish With Nearby Gaming: Muni CreditElise Young and Michelle Kaske
Atlantic City’s recovery from Hurricane Sandy delivered a 45 percent drop in borrowing costs in 2013. That may be as good as it gets as the resort’s casino revenue slides for a seventh straight year.
A year after Atlantic City survived the biggest storm in New Jersey history, its casino revival is faltering amid competition from nearby states. Its 12 venues are on pace for their worst year in more than two decades. The owner of the Revel Casino-Hotel, a $2.6 billion resort Governor Chris Christie is counting on to inject new life into the city’s gambling market, filed for bankruptcy in March, emerging in May.
The struggles don’t bode well for bonds of the city, said Howard Cure, director of municipal research at Evercore Wealth Management LLC. Christie based a 2011 Atlantic City turnaround plan on tax incentives, a $30 million advertising campaign and a state-run tourism district. Yield spreads may swell for the municipality, Cure said, after they shrank in September to the lowest monthly average for 2013.
“Atlantic City is one of the few places since the recovery that still has lost revenues in gaming,” said the Manhattan-based Cure, whose firm oversees about $4.7 billion. “If spreads widen for weaker credits and issuance picks up, there will be less demand for A.C. paper and existing holders could suffer.”
Christie, a 51-year-old Republican seeking re-election in November, has made turning around Atlantic City a driver of his plans to revitalize New Jersey’s economy. The state is about midway through a five-year plan to help revive the city, which is showing few signs of recovery.
Michael Drewniak and Colin Reed, spokesmen for Christie’s office, didn’t reply to a phone call and e-mails for comment on the city’s finances.
New Jersey approved casinos in 1976 and limited them to Atlantic City to boost its finances. The first casino, Resorts International, opened in 1978. Gambling revenue rose every year until 2007, when the 18-month recession began, and after neighboring states, including Pennsylvania and New York, added slot machines.
Last year, Atlantic City lost its title to Pennsylvania as the second-biggest U.S. gambling market, behind Las Vegas, in terms of gross gambling revenue before taxes, salaries and expenses. New Jersey’s casino revenue dropped to about $3 billion, from a record $5.2 billion in 2006.
This year, the casinos are expected to generate $2.9 billion or less, partly because of Sandy, according to Bloomberg Industries.
The Oct. 29 storm hurt business, even though resorts suffered little physical damage. The venues closed the day before and didn’t all reopen until Nov. 5. A record 19.9 percent drop in October revenue was broken in November with a 27.9 percent decline. In June, a study by the South Jersey Transportation Authority found less travel to Atlantic City during the first quarter, attributing the decrease to tourists’ misperception that Sandy had heavily damaged the resort.
On Sept. 17, a U.S. appeals court threw out a New Jersey law allowing sports betting, saying it was pre-empted by federal law. The move snuffed out a projected $100 million in first-year state revenue. Christie said he will challenge the decision in a petition to the U.S. Supreme Court. New York voters next month will consider whether the state should allow construction of as many as seven casinos.
The sagging revenue outlook hasn’t been reflected in the city’s debt.
Bonds maturing in November 2016 and graded six levels below top-rated munis were valued yesterday by BVAL analysis at a yield spread of 0.76 percentage point, down from 1.38 percentage point at the start of the year. The average September spread of 0.53 percentage point when using trades reported by the Municipal Securities Rulemaking Board was the smallest for any month this year.
“You would think the bonds would not be in great demand,” Cure said of Atlantic City debt.
Some investors are shying away because the casinos “have way too much competition,” said John Mousseau, who helps manage about $2.2 billion of munis as director of fixed income at Cumberland Advisors in Vineland, New Jersey.
“The casino biz is on a slippery slide downhill,” he wrote in an e-mail.
One bright spot may be online gambling, Christie says. New Jersey, the third state to legalize Internet bets after Delaware and Nevada, expects to open casino-run online betting by Nov. 26, with estimated first-year state revenue of as much as $180 million, according to Christie’s office.
Moody’s Investors Service grades the city’s credit rating Baa1, three levels above speculative grade, as a result of increased competition and borrowing for casinos’ tax-assessment refunds. At-home bettors won’t help Atlantic City tourism, according to a Sept. 19 Moody’s report.
The 12 Atlantic City properties make up more than two-thirds of the city’s tax base. Their appeals of a 2008 revaluation led to a 26 percent drop in municipal taxable valuation. The city approved a 22 percent tax-rate increase, and collections went down 3 percent, according to a city-issued budget comparison.
“The city’s been very, very willing to increase the tax rates over the last few cycles,” said Dennis Derby, a portfolio manager at Wells Capital Management in Menomonee Falls, Wisconsin. The company manages $34 billion of munis, including Atlantic City debt.
Atlantic City had about $219 million of net debt as of Dec. 31, according to bond documents. About 75 percent of the city’s debt will mature within 10 years and all of it by 2032, according to a Nov. 16 Standard & Poor’s report.
“We’re not looking at an overly leveraged situation at this point in time,” Derby said.
The city’s $36.8 million in debt service represents 15 percent of the $249.2 million budget. Spending remains within Christie’s 2 percent budget cap and Mayor Lorenzo Langford plans to hold appropriations level, according to Michael Stinson, the city’s director of revenue and finance.
“We’re holding the expenses in line,” Stinson said. “We’re not overshooting too badly.”
The next test is an expected tax-court ruling for the 10-year-old Borgata Hotel Casino & Spa, seeking a valuation of $870 million for 2010 and 2009, compared with the city’s $2.3 billion figure.
“There’s a big question mark in what is going to happen to the city’s tax rate for next year,” Stinson said.
Issuers nationwide have scheduled about $7.8 billion of borrowing in the next 30 days, or 17 percent below this year’s average, as the federal government shutdown persists.
Top-rated 10-year munis yield 2.72 percent, close to a three-month low, and compared with 2.63 percent for similar-maturity Treasuries.
The ratio of the yields, a gauge of relative value, is about 103 percent, where the average has been 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.
The sports-betting case is National Collegiate Athletic Association v. New Jersey, 13-1714, U.S. Court of Appeals for the Third Circuit (Philadelphia).
Following is a pending sale:
Wisconsin will offer $563 million in general obligations this week to refinance debt coming due this year and in 2014, according to data compiled by Bloomberg and Fitch Ratings. The company grades the forthcoming securities AA, third-highest. Standard & Poor’s also ranks the issue AA, saying the state’s finances are in the best shape since 2000.