Tags: Atlantic City | municipal | debt | junk bond

Atlantic City's Downward Spiral Seen in Sale's Junk-Like Yield

Thursday, 23 October 2014 11:57 AM

Investors demanded yields typical of junk-rated debt to buy investment-grade bonds backed by luxury taxes in Atlantic City in a sign of the cost of the seaside community’s downward financial spiral.

New Jersey’s Casino Reinvestment Development Authority, created in 1984 to spur economic development and job creation in the resort town, issued $241 million of debt yesterday that had investment grades from four credit raters, data compiled by Bloomberg show. Bonds maturing in November 2044 priced to yield 4.69 percent, compared with 3.97 percent for a benchmark index of similarly rated bonds, the data show.

The extra yield shows investors’ unease with buying bonds backed by levies on hotel rooms, alcoholic beverages and entertainment in the onetime East Coast gambling capital that’s set to lose as many as five casinos this year. Moody’s Investors Service dropped the locality to junk in July because of dependence on the gambling industry.

“There’s a pretty substantial amount of spread there for the rating,” said Paul Brennan, who runs a $288 million New Jersey muni fund at Nuveen Asset Management in Chicago. “The crucial component that’s got people uncomfortable is the city has seen four casinos close. A lot of investors are going to shy away without popping the hood.”

Casino Closings

Atlantic City was a decaying resort until New Jersey legalized casino gambling there in 1976. Revenue peaked above $5 billion in 2006, and the community of about 40,000 saw casino- generated funds decline to $2.9 billion in 2013. The take is down a further 6.4 percent this year.

Trump Plaza, Caesar’s Entertainment Corp.’s Showboat, Revel and the Atlantic Club, all battered by out-of-state competition, closed this year. Trump Taj Mahal may shut next month, leaving the city with seven casinos.

Even with the casino industry’s decline, the taxes backing the bond offering have proved resilient, Fitch Ratings said in an Oct. 8 report that graded the debt BBB+, three steps above junk. The revenue stream grew an average of 6.1 percent annually from 2004 to 2013 and collections through July were up 5.9 percent from last year’s pace, Fitch said.

The revenue consists of a 9 percent tax on hotel rooms and ticket purchases at theaters and other entertainment venues, and a 3 percent levy on alcoholic beverages. Hotel taxes make up 73 percent of the collections.

Yield Seekers

Elaine Zamansky, a spokeswoman for the casino reinvestment authority, referred questions to the state treasurer’s office.

“Investors are seeking yield and the bonds are backed by a strong revenue stream,” Joseph Perone, a treasury spokesman, said by telephone yesterday. The authority’s involvement “is a positive step for the seaside resort as it tries to remake itself and become a more appealing venue in the convention and exhibition industry.”

New Jersey collects the taxes and the money then flows to a fund held by a trustee for bondholders, according to Fitch.

“Given the recent casino closures we did several stress tests and lots of cuts of the revenue source,” Marcy Block, a Fitch analyst, said in an Oct. 21 interview. “There is some thought that some of those paying customers are going to be absorbed by the other casinos.”

The safeguards failed to sway investors. The 4.69 percent yield on the development agency’s 30-year debt compared with a 4.8 percent rate on speculative-grade bonds with a similar maturity sold this month for charter schools in Arizona.

Confidence Plan

Nuveen considered buying the debt either for its New Jersey fund or its $10.3 billion high-yield fund, Brennan said. Given the association with Atlantic City and New Jersey, which has the second-lowest Moody’s rating among states, funds focused on junk debt may be the primary buyers, he said.

“Even though the ratings are pretty decent, there’s a lot of yield in this transaction,” Brennan said. “The issuer knows what the expectations are.”

Proceeds will refinance debt, fund improvements to the Atlantic City Convention Center and Boardwalk Hall, and pay a legal settlement related to a tax credit from 14 years ago.

About $60 million will finance the settlement, while $90 million will fund projects, according to Moody’s.

The agency is empowered to “maintain public confidence in the casino gaming industry as a unique tool of urban redevelopment,” according to offering documents.

Third String

Confidence has waned since the city dropped to the third- largest U.S. gambling market after Nevada and Pennsylvania.

Revel, the shuttered casino and hotel that opened in 2012, was the city’s second-largest taxpayer. Brookfield Property Partners LP, which won the bidding for the property, said it plans to reopen it.

The purchase is supportive amid a negative outlook for gaming in Atlantic City, according to Fitch. The luxury-tax revenue could withstand annual declines of 2.5 percent while still covering debt service, the company said.

“The uncertainty with this transaction is all these customers that were at these casinos, bought drinks and went to concerts, will they come back and stay at other hotels and go to other casinos?” Brennan said. “That’s going to be the big issue.”

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Investors demanded yields typical of junk-rated debt to buy investment-grade bonds backed by luxury taxes in Atlantic City in a sign of the cost of the seaside community's downward financial spiral.
Atlantic City, municipal, debt, junk bond
Thursday, 23 October 2014 11:57 AM
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