Casinos and Gaming

Haunted by dire finances, Atlantic City rolls the dice on new debt offerings

A sign marks the Trump Taj Mahal Hotel and Casino in Atlantic City.
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If sports betting were a reality in New Jersey, this weekend would be a much-needed boon for Atlantic City. Spectators could flock to the seaside resort to place millions of dollars' worth of Super Bowl wagers, thus adding revenue to the hard-hit city's coffers.

That's hardly the case. The state's push to allow sports betting in New Jersey casinos and racetracks is tied up in a federal-level legal suit with the NFL and major sports leagues. Until that gets resolved, the city will remain plagued by high unemployment, crime and a rapidly eroding property tax base.

Now, Atlantic City is engaging in another type of gamble: convincing investors to buy its junk-rated bonds, only months after New Jersey threw it a $40 million lifeline.

This week city officials arranged a $12 million note sale to drum up capital to repay other debt coming due on Feb. 3. However, the sale of one-year notes was converted to a negotiated transaction, a sign that the struggling municipality could be having a hard time finding buyers.

It's no wonder. New Jersey Gov. Chris Christie recently signed an executive order appointing an emergency manager team to develop a financial-stabilization plan within 60 days. The plan may include "the adjustments of the debts of Atlantic City," a phrase that immediately signaled trouble to the bond market.

Adding to that, the team's special consultant is Kevin Orr, Detroit's former emergency manager who led that city through the biggest municipal bankruptcy in U.S. history. The appointment drew immediate comparisons to the Motor City's Chapter 9 restructuring and bondholder struggles.

Read More NJ brings in former Detroit turnaround boss Orr for Atlantic City

"That statement, along with the appointment of two bankruptcy and restructuring experts, signals a paradigm shift in the state's tradition of support for its municipalities," warned analysts at Moody's Investors Services in a report. "It signals a limit to the state's willingness to provide the financial support necessary to prevent a municipality from defaulting or declaring bankruptcy."

This new approach, according to Moody's, indicates an increased possibility of default and/or bankruptcy, not to mention, sets a precedent for other financially troubled New Jersey municipalities, including Newark and Camden.

For that reason, Moody's dramatically slashed Atlantic City's general obligation rating six steps deeper into junk territory, to Caa1 from Baa1, indicating a high risk of default over the next five years. In the wake of the move, yields on some of the city's debt surged to record highs.

On Tuesday, Standard & Poor's Ratings Service followed suit, downgrading its rating four notches into junk status, and placing it on Credit Watch with negative implications.

Beware the death spiral

Saving Atlantic City: Steve Schirripa
Saving Atlantic City: Steve Schirripa

"Atlantic City's credit standing was very highly concentrated even under the best of circumstances," says Tom Kozlik, a director and municipal credit analyst at Janney Capital Markets. "Investors should remember bond payment defaults are different than Chapter 9 bankruptcy protection. I do not think that either is inevitable, but one or the other or a combination is possible."

Atlantic City has been suffering for years, but the past 12 months have been particularly painful. More than 8,000 workers lost their jobs, pushing Atlantic County's unemployment rate back above 11 percent, as the national rate returns to prerecession lows.

The one-time East Coast gaming mecca lost four of its casinos—a third of the city's previous total—last year, including the twice-bankrupt $2.4 billion Revel Casino Hotel. A fifth, the Trump Taj Mahal, is in bankruptcy. That resort is open, at least for now, thanks to $20 million in last-minute, additional financing from its biggest creditor, Carl Icahn.

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As casinos have mushroomed up in nearby states, they've stolen the thunder from Atlantic City, which has hemorrhaged much-needed visitors. Since the city's 2006 peak, gaming revenue has plunged more than 45 percent; over the past five years, property taxes have been halved as well, as casinos' real estate values have dropped, an issue further exacerbated by recent casino closures.

The gaming industry accounts for as much as 70 percent of Atlantic City's fiscal budget each year. The string of bankruptcies punched holes in that balance sheet, forcing the mayor's office to make difficult cutbacks on city jobs and projects.

Is the end near?

Still, there has been a silver lining. Fewer competitors have meant more revenue for the resort's remaining eight casinos. Despite the tumult, the steep yearslong plunge in gaming revenue slowed to a better-than-expected 4.5 percent decline last year. Of the businesses still open, five actually posted revenue gains, spurring analysts to suggest the local gaming market may be beginning to stabilize.

Closed properties are attracting new investors, as well, lured by unbelievably low price tags on property. Caesar Entertainment's shuttered Showboat Casino property was recently sold to Richard Stockton College, and Florida-based developer Glenn Straub is acquiring the adjacent Revel property for a nominal $95.4 million.

Yet as the city scrambles to reinvent itself and attract more of that much-needed private investment, it has increasingly turned to the capital markets to drum up funding, a prospect jeopardized by the plunge in its credit ratings.

In the coming months, officials are also looking to borrow $140 million from the market to repay the state's emergency loan as well as $88 million owed to the Borgata Casino Hotel as part of a tax-appeal settlement.

However, with an emergency manager and two subsequent ratings downgrades, investors and analysts are now more worried than ever that the city once cheerfully known as America's Favorite Playground may in fact become a battleground for bankruptcy.