Atlantic City Bondholders Expect Losses Even With Takeoverby and
Legislative compromise may not prevent debt restructuring
Gaming hub may run out of money in weeks as default predicted
Even if New Jersey lawmakers strike a deal on how to rescue Atlantic City, bondholders shouldn’t rest easy.
Leaders of the state’s legislative chambers said Monday they were working on a bill that would reconcile competing approaches to fix Atlantic City. State and city officials have been fighting for weeks over the level of state control and whether the municipality could enact deeper spending cuts that could mean new labor contracts for workers.
State intervention wouldn’t necessarily prevent creditors from being saddled with losses, said Jim Colby, who runs the $1.9 billion Market Vectors High Yield Municipal Index exchange-traded fund at Van Eck Global. Colby pointed to Detroit, which was in the hands of a state-appointed emergency manager who led it into a record bankruptcy resolved in part through a debt restructuring. Governor Chris Christie has indicated he could let Atlantic City go into court protection.
“We’ve seen situations around the country where support is given, but there are conditions aimed at restructuring," said Colby, whose fund holds some uninsured Atlantic City debt. "I’m not overly pessimistic, but I’m not optimistic."
Atlantic City, which once had a monopoly on gambling on the East Coast, has been veering toward insolvency since a third of its 12 betting parlors closed in 2014. Other casinos have successfully challenged the size of their tax bills, and the city’s property-tax base has tumbled by more than two thirds since 2010, according to Moody’s Investors Service.
State actions to assist the resort community of 39,000 have been inadequate, said S&P Global Ratings. The company said earlier this month that default or a debt restructuring was a virtual certainty. No New Jersey municipality has defaulted or entered court protection since the Great Depression.
"Hopefully, it will be a bill that’s fair for Atlantic City and fair for everyone who has skin in the game," said State Assembly Speaker Vincent Prieto after a news conference Monday in Trenton.
Dan Belcher, a senior municipal analyst at ColumbiaThreadneedle Investment Advisers, said the fact that New Jersey has historically supported its distressed municipalities fuels the chance for a rescue for Atlantic City that wouldn’t undermine bondholders.
"We’re hopeful that in the end the state does step in,” said Belcher, whose firm manages $26 billion in municipals, including Atlantic City general obligations. However, "we’re not overly optimistic at this point that they’ll avoid bankruptcy."
ColumbiaThreadneedle purchased the city’s securities at a discount in a strategy that would still pay off if the recovery rate from any bankruptcy or restructuring would be more than what it spent, Belcher said.
Any sustainable solution for Atlantic City has to involve bondholders and casinos who are owed refunds on their taxes, along with state and city officials, said Jason Diefenthaler, who runs a high-yield muni fund at Wasmer Schroeder & Co. in Naples, Florida.
"Until you can get all four of those groups on the same page, it’s going to be very difficult for them to put forth a plan that I think is acceptable in the eyes of the bond market," said Diefenthaler. Last month, he sold securities from the city’s water securities because of the uncertainty around what a restructuring of Atlantic City would look like, if it occurred.