If New Jersey Governor Chris Christie expects his newly appointed emergency management team in Atlantic City to steer the city towards a bankruptcy filing, he is in for a “big fight” politically.
New Jersey Senate President Stephen Sweeney said the governor wants to see the city in bankruptcy and promised to fight against such a move, even if it means going to court.
“This state is in trouble,” Sweeney said. “This state has had eight bond rating downgrades. We all know about that. But the real problem is when the administration hires two bankruptcy experts to come into a city to assist the city. What do you think they’re going to assist them with? We cannot nor will we ever allow the city to go bankrupt.”
But the city’s debts took a major hit when several ratings agencies dramatically downgraded the city’s financial situation.
Moody’s Investors Service downgraded Atlantic City’s general obligation debt to Caa1 with a negative outlook from Ba1. That’s a downgrade of six levels.
Standards & Poor’s Ratings Services followed dropping the resort’s rating four levels to BB junk bond status.
The services pointed directly to the appointment of the management team as the reason for the downgrade.
“The implementation of an emergency manager signals to Standard & Poor’s that the state does not view the city as capable of resolving its challenges without outside intervention,” said Standard & Poor’s credit analyst Lindsay Wilhelm. “In our view, third-party intervention is often more draconian than the actions taken to date and has a greater likelihood of being detrimental to bondholders.”
Moody’s downgrade to Caa1 also was directly related to the appointments.
“This is a rapid, dramatic change from the state of New Jersey’s prior policy of preventing default or bankruptcy of Atlantic City or any New Jersey local government,” the release states. “The Caa1 rating indicates a high risk of default over the next five years.”
The city currently has $344 million of outstanding long-term general obligation debt and $397 million of total debt, according to a Moody’s release. The city also has a $12.8 million debt due in February.
The city plans to roll over the $12.8 million of short-term notes that come due February 3 by issuing new notes. An initial date for the rollover was delayed last week by a winter storm in the Northeast. The delay could mean the city would have to repay noteholders on or near the February 3 deadline.
Atlantic City “absolutely” has enough money to pay off the maturing notes if it needs to, city revenue director Michael Stinson told Reuters.
The notes were issued in 2013 to pay for repair projects after Hurricane Sandy.
Christie used an executive order to appoint corporate finance consultant Kevin Lavin as emergency manager over Atlantic City’s finances and operations. Kevyn Orr, who helped lead Detroit through its financial crisis, was appointed as special counsel to Lavin. The order requires state and local agencies and workers to cooperate with the team.
But officials stopped short of calling the move a state takeover of the city and both men said talk of whether thee city will enter bankruptcy is “premature.”
Under the executive order, the management team is to produce a turnaround plan within 60 days “to place the finances of Atlantic City in stable condition on a long-term basis by any and all lawful means.” Officials expect it will take about 90 days to implement the plan and then 90 days to see results.
Still the ratings agencies maintain that the move implies bankruptcy will follow and both also said the move calls into question the future of every struggling city in the state.
“The action is credit negative not only for Atlantic City, which is suffering from a rapid contraction of its casino-based economy, but also for other financially troubled New Jersey municipalities,” Moody’s said.
The agency said the move signals “a limit to the state’s willingness to provide the financial support necessary to prevent a municipality such as Newark or Paterson from defaulting or declaring bankruptcy.”
However, yields on some debt issued by Atlantic City rose to all-time highs in secondary market trading early last week after falling significantly after the appointment of an emergency manager was announced the week before, Reuters reports.
Sweeney, meanwhile, was speaking at a Trenton meeting of the New Jersey Conference of Mayors.
Despite Atlantic City’s woes, Sweeney has been a vocal advocate in the city and told Atlantic City Mayor Donald Guardian, who was at the meeting, “I’ve got your back.”
“Read my lips, we are not going to do bankruptcy,” Sweeney said. “As the presiding officer of the Senate, I would go into court to stop it.
“We will go to court, we will do whatever is necessary to stop this,” he continued. “We might have to get a big fight here. And I’m looking for the Conference of Mayors to get on board. Because if it’s him, who’s next?”
Sweeney was on hand when the governor announced the appointments at a press conference, but has not spoken out on the move before.
Christie and the two new appointees have all said it is premature to talk of a bankruptcy for the city—the team is first studying the city’s finances—but Sweeney said he expects them to call for a bankruptcy filing.
“This administration is trying to force a bankruptcy. Trying to force it,” Sweeney said. “So we—every one of you out there—should be concerned about that.”
Sweeny also pointed to actions by Standard’s & Poors and Moody’s to cut the city’s bond rating to junk status after announcement of the appointments.
“It’s the wrong focus. It’s the wrong practice,” Sweeney said. “And I’ll tell you, every one of us should be concerned and outraged over this. You don’t hire bankruptcy experts to dig out of a hole. You hire bankruptcy experts to bury it.”
Sweeney has introduced a tax package intended to help Atlantic City that would have casinos make a set payment in lieu of taxes for 15 years to help stabilize the resort’s tax base. The payments would be based on casino revenue. A vote on the bills has been delayed, however, as residents and businesses complained that the bill does nothing to alleviate their tax burdens.
