Christie Failing on Atlantic City Vow as Debt Sinks: Muni Credit
(For more credit-market news, click on TOP CM. To set Municipal Credit Markets column alerts, see SALT MUNCREDIT.)
Jan. 31 (Bloomberg) -- Atlantic City, the seaside casino resort that Governor Chris Christie says is key to New Jersey’s recovery, is floundering after six straight years of declining gambling revenue. Bond investors are sharing the city’s pain.
Two years after Christie created a state-controlled casino district to help revive the city, it’s still losing business to neighbors. Pennsylvania, which expanded gambling, passed New Jersey in 2012 to become the second-largest U.S. betting market after Nevada. Casino-tax revenue is 26 percent below Christie’s budget target midway into the fiscal year, and Hurricane Sandy, which shut the city for five days, is only partly to blame.
In the $3.7 trillion municipal-bond market, buyers are penalizing the city. The extra yield debt-holders demand on some Atlantic City obligations has grown about 10 percent since early December, data compiled by Bloomberg show. The added cushion still falls short of compensating for the city’s fiscal challenges, said Matt Dalton at Belle Haven Investments Inc.
“At some point they may be a value, but right now they’re trading too tight for the risk,” said Dalton, who helps manage $1.2 billion in munis in White Plains, New York. “It’s just been dealt a different hand than it had been a decade ago.”
Atlantic City’s 12 casinos generated $3.05 billion of revenue last year, down from a 2006 peak of $5.2 billion. The decline will continue, even with the new $2.4 billion Revel casino, unless New Jersey adds a source of gambling income, said state Senator Ray Lesniak. The Democrat is urging Christie to sign a bill to let casinos run online wagering operations.
Lesniak, of Elizabeth, said Internet gambling is the “best shot” at resuscitating Atlantic City. Dennis Farrell, an analyst at Wells Fargo Securities LLC in Charlotte, North Carolina, estimated that online gaming could generate $1.5 billion of revenue for New Jersey casinos over the next five years, and $150 million in annual state tax revenue.
“This is one of the last chances the governor has to provide a lifeline to Atlantic City casinos,” Farrell said in a Jan. 24 report. “Online gaming sites operated by state casino operators will lead to job creation and drive visitation to Atlantic City.”
Christie, who has until Feb. 7 to act on that measure, vetoed an earlier version and has said he is concerned it would increase gambling addictions. He signed a bill last year to permit betting on professional and college sports at casinos and racetracks, even though a 1992 U.S. law bans such wagering in all but four states: Nevada, Delaware, Montana and Oregon.
The governor, who took office in January 2010, gave Revel Entertainment Group LLC a $261 million tax break to help restart construction of Atlantic City’s first new casino in nine years. Gambling revenue from Revel, which opened last year, has been “well below” expectations, S&P said in a November report.
“Gaming will come around,” Christie told reporters last month. “What I’m most encouraged about is it’s still extraordinarily busy -- with exception of the time during the storm obviously -- in terms of its hotel occupancy, in terms of its restaurants and its events it’s holding there.”
Michael Drewniak, a spokesman for Christie, referred to the governor’s December comments on Atlantic City and declined to comment further.
Christie, 50, has refused to consider another measure that would allow casinos in northern New Jersey until he sees whether his five-year Atlantic City turnaround effort begun in 2011 pans out. His plan includes tax breaks for developers and state oversight of policing and cleanup.
Atlantic City’s casinos pay an 8 percent tax, generating $247 million in the fiscal year that ended June 30. Christie projected that revenue would jump 16 percent this year. From July through December, casino-tax revenue was down 6.3 percent.
“I don’t see any scenario under which Atlantic City can return to a $5 billion market again,” said Joseph Weinert, a senior vice president at Spectrum Gaming Group LLC, a casino research and consulting firm in Linwood, New Jersey.
New Jersey approved casino gambling in 1976 and limited it to Atlantic City to help revitalize the once-bustling beach resort. The first casino, Resorts International, opened in 1978. Gambling revenue rose every year until 2007, when the recession began and casinos opened in nearby states, including Pennsylvania and New York.
Six of Atlantic City’s casinos went through bankruptcy or restructured debt during the financial crisis, and development stalled. Casinos appealed their property-tax assessments in the wake of the slump, and the city has borrowed almost $150 million to cover the payouts, according to Standard & Poor’s.
Those budgetary pressures led S&P to cut its rating on the city’s general obligations in April to A-, its seventh-highest grade, from A. The company removed its negative outlook on the debt in October, saying the payouts had led to “short-term stabilization of its still-weak financial position.”
Still, the yield spread on Atlantic City bonds due in November 2022 widened this month to 1.3 percentage points above benchmark munis, from 1.18 percentage points when the debt priced Dec. 5, data compiled by Bloomberg show.
Casinos comprise more than two-thirds of the tax base in Atlantic City, where more than a quarter of its 40,000 people live in poverty. Mayor Lorenzo Langford and Revenue Director Michael Stinson didn’t return telephone calls seeking comment on the city’s finances.
Christie said Revel would be a catalyst for Atlantic City’s transition from day-trip to luxury resort destination. Some lawmakers are now trying to lure back some of those day-trippers with a measure that would exempt casino-bound tourist buses from paying tolls on state highways.
John Kim, 35, a Flushing, Queens, resident who runs a Brooklyn dry cleaner, said Christie needs to allow Internet betting.
“Nothing beats convenience, like being able to gamble in your own living room.” Kim said outside of the Wild Wild West casino Jan. 25. “They need to innovate if they want to get their customers back from all of these other states.”
In trading yesterday, tax-exempts fell along with Treasuries after the Federal Reserve said it will continue purchases of securities to support the economy. Yields on benchmark tax-exempts due in 10 years climbed to 1.79 percent, the highest since Jan. 8, Bloomberg Valuation data show.
Following is a pending deal:
WISCONSIN plans to sell about $246 million of revenue bonds as soon as today, Bloomberg data show. The debt will be repaid with vehicle registration fees, according to bond documents. Proceeds will help finance transportation facilities, highway projects and refund debt. (Added Jan. 31)
--Editors: Stacie Sherman, Mark Tannenbaum