New Jersey’s shutdown of nonessential businesses to fight the spread of COVID-19 resulted in a negative credit outlook for the state’s Casino Reinvestment Development Authority.
Fitch Ratings revised the outlook on roughly $220 million of CRDA luxury tax revenue bonds to negative from stable Friday citing closures of Atlantic City casinos that took effect March 17. Fitch also affirmed the agency’s rating at BBB-plus.
“The revision of the Outlook to Negative from Stable on the 'BBB+' rating on CRDA's luxury tax revenue bonds reflects significantly increased uncertainty regarding the collection of luxury tax revenues commensurate with the material disruption in leisure, convention and gaming markets, which may last for an extended period of time,” Fitch analyst Marcy Block wrote in Friday’s report.
“Pledged revenues are inherently volatile and Fitch anticipates a significant decline in 2020 collections due to social-distancing measures related to the coronavirus,” she wrote.
The Fitch action follows S&P Global Ratings, which also revised the CRDA's outlook for its BBB-plus-rated bonds to negative from stable on March 26. Moody’s Investors Service rates the CRDA’s luxury tax revenue bonds one notch lower than Fitch and S&P at Baa2 with a positive outlook.
Moody’s revised the outlook on the bonds to positive from stable in January before the COVID-19 pandemic, citing a strengthening gaming sector that was expected to generate improved debt service coverage.
The CRDA was established in 1984 as a state agency to collect and distribute certain taxes and fees paid by Atlantic City casinos for development projects. New Jersey redirected the state’s casino investment alternative tax from the CRDA toward Atlantic City debt service under a five-year state takeover of the gambling hub that took effect on Nov, 9, 2016.
The affected CRDA bonds are special, limited obligations of the CRDA that are secured by luxury tax receipts levied in Atlantic City and collected by the state of New Jersey. The pledged revenues consist of a 9% hotel room tax, 9% tax on ticket purchases at theaters, exhibitions and other entertainment venues along with a 3% tax for on-premises alcoholic beverage consumption.
Block noted that strict COVID-19 protocols put in place last month are likely to “severely” affect the CRDA since the highest amounts of the agency’s luxury tax receipts tend to be collected in the spring and summer months. Prior to the casino closures, the CRDA was on pace for a strong year following a solid 2019 where annual luxury tax receipts jumped 2.3% from 2018 to about $40 million. Fitch is also forecasting generally flat CRDA revenue over the long term because of concerns about ongoing regional gambling competition.
“Fitch expects a substantial decline across all pledged revenues in fiscal 2020 as visitation to Atlantic City is expected to be weak relative to prior years,” Block said. “Once economic recovery takes hold, resiliency is expected to improve but will likely fall short of historical levels.”
The New Jersey Division of Gaming Enforcement reported on March 13 that the Atlantic City casino industry reported its 21st straight month of revenue gains in February.
The streak, which is expected to end in March due to the COVID-19-related closures, stretched back to June 2018 when Atlantic City’s two newest gambling properties, Hard Rock Hotel & Casino and Ocean Casino Resort, opened for the first time.
