New Jersey's apparent willingness to let Atlantic City default may hurt the credit of other municipalities because it calls into question the state's future willingness to support distressed local governments, according to Moody's Investors Service.
Gov. Chris Christie's March 24 remarks that Atlantic City bondholders should be prepared to make sacrifices to save the city's finances are a credit negative for other struggling cities in the Garden State like Newark and Paterson, Moody's analysts Josellyn Yousef and David Strungis said in a report Wednesday.
The comments indicate the state is considering "impairing" bondholders either through a negotiated debt restructuring or a Chapter 9 bankruptcy filing, they wrote. The analysts also highlighted that a 2015 report from former Atlantic City Emergency Manager Kevin Lavin also suggested debt deferrals to help close the city's structural deficit.
"Governor Christie's comment suggests the state may have reached the point of viewing a default as a desirable outcome," said Yousef and Strungis. Taken together, these actions go further than merely signaling a limit to the state's willingness to prevent a default."
Moody's downgraded Atlantic City two notches to Caa3 Monday due to default concerns.
Yousef and Strungis said bondholders could agree to a voluntary restructuring of the city's $245 million in general obligation debt, which Moody's would view as a distressed exchange. Moody's constitutes a distressed exchange, missed or delayed debt service payment and bankruptcy as defaults, the report notes.
"While Atlantic City is an extreme case and no other New Jersey municipality is currently facing such acute financial pressure, the state's posture toward Atlantic City reduces the likelihood that it would rescue other financially distressed cities," said Yousef and Strungis. "While the state has no legal obligation to support Atlantic City's GO bonds, its historically strong support for local governments has bolstered the credit quality of financially weaker municipalities."
Yousef and Strungis noted that Harrisburg, Pa., which changed the payment terms of a credit agreement in 2013, is another example of a large locality entering into a distressed exchange outside of bankruptcy. After defaulting on both a guarantee and its own GO debt, Pennsylvania's capital city negotiated settlements with creditors that resulted in an average 75% recovery rate.
"Should the state's credit quality and liquidity deteriorate due to pension pressures or another recession, the state may be both unable and now unwilling to extend the same level of historical support as it has in the past," said Yousef and Strungis. "During the last economic recession, the state significantly cut transitional aid to financially struggling municipalities to reduce pressure on its own budget."
Moody's rates New Jersey A2 with a negative outlook, the second lowest rating of the 50 U.S. states ahead of only Illinois.
