Fitch Affirms NJ Casino Reinvestment Development Auth Luxury Tax Revs at 'BBB+'; Outlook Stable.
The Rating Outlook is Stable.
The bonds are special, limited obligations of the authority, secured by luxury tax receipts levied in the city of Atlantic City, collected by the state of New Jersey (Issuer Default Rating A/Stable), and deposited with the trustee, before deposit of residuals with CRDA.
KEY RATING DRIVERS
WEAK GROWTH PROSPECTS: The luxury tax's diminished performance over the past several fiscal years reflects losses attributable to the closure of five large casinos and the detrimental effects of ongoing regional competition. Revenues have generally been declining since fiscal 2013 and the year-over-year decline in the fiscal year that ended Dec. 31, 2016 was above Fitch's expectations.
SATISFACTORY DEBT SERVICE COVERAGE: Debt service coverage from pledged revenues remains satisfactory but the continued revenue declines creates uncertainty on future coverage levels. However, given the lack of future expected leveraging and currently satisfactory debt service coverage, the structure can adequately absorb a decline in revenues expected to result from a moderate recession scenario.
VARIABLE GAMING INDUSTRY: Atlantic City's gaming industry is expected to be stable in the near term following industry consolidation and the defeat of a ballot measure to expand casino gaming throughout the state. Fitch views Taj Mahal's reopening as a Hard Rock Casino in mid-2018 neutrally as the casino is expected to offset some of the other operators' gains. Long-term, the gaming industry in Atlantic City is expected to remain subject to regional competitive challenges, affecting activities that are subject to the luxury tax.
SATISFACTORY LEGAL PROVISIONS: A 1.5x maximum annual debt service (MADS) test for additional bonds limits leverage of pledged resources. Coverage is expected to remain above this threshold even with no anticipated revenue growth.
CONNECTED TO STATE BUT SEPARATE FROM CITY OPERATIONS: CRDA is an instrumentality of the state of New Jersey, and the state is the collecting agent of the luxury tax revenue. Debt issuance that pledges the luxury tax is also controlled by the state. Legal opinions have been satisfactorily rendered regarding the separation of the pledged revenue stream from the financial operations of the city of Atlantic City.
VISITOR AND CASINO TRENDS: The rating is sensitive to changes in visitor dollars spent on gaming and entertainment and attendance at conventions in Atlantic City, which is influenced in turn by consumer tastes, the attractiveness and availability of rival gaming options in the mid-Atlantic region, as well as competing convention center venues.
MAINTENANCE OF SATISFACTORY COVERAGE: The rating is also sensitive to the continued maintenance of satisfactory coverage by pledged revenues. A further decline in pledged revenue in 2018 with prospective additional contractions could put downward pressure on the rating.
Pledged luxury tax revenues consist of a 9% hotel room tax, a 9% tax on ticket purchases at theaters, exhibitions, and other places of amusement, and a 3% tax on on-premises alcoholic beverage consumption, levied in the city. Drinks, hotel rooms, and tickets that are provided on a complimentary basis are not subject to the tax. There is some seasonality in revenue collections with the highest amounts collected in the summer and spring months.
WEAK REVENUE GROWTH PROSPECTS
Challenges to Atlantic City's attractiveness as a gaming destination, including due to competitive pressures from nearby facilities in other states, online gaming options, and generational shifts, have affected pledged revenues in recent years and are likely to continue. The magnitude of declines through 2016 has been generally in line with Fitch's expectations although higher than typical level of adjustments reduced final revenue in 2016.
Four casinos, Atlantic Club, Revel, Showboat and Trump Plaza, ceased operations during 2014, followed by the closure of the Trump Taj Mahal during the third quarter of 2016. Revenue from the luxury tax derived solely from hotel rooms declined by a cumulative 17.8% from 2014 through 2015 but grew 3.7% in 2016 despite the Taj Mahal's closure. Conversely, through July 2017, the luxury tax on hotel rooms has fallen 3% year over year. The reopening of the Taj Mahal as a Hard Rock casino in mid-2018 will have an indeterminate impact on this revenue source as the Hard Rock is likely to cannibalize patrons from the remaining casinos.
Overall pledged revenue loss was above Fitch's expectations at 2.7% in 2016, as it incorporated a larger than typical number of adjustments. Absent adjustments, luxury tax revenue increased. Casino closures have an ancillary impact on the proportion of pledged revenues coming from each tax source given that hotel closures also shuttered associated restaurant and entertainment venues. Hotel tax revenue makes up 74% of total pledged revenues, with liquor (14% of total) and entertainment taxes (14%) generating the remainder. Both the alcohol-by-the-glass tax and tax on entertainment declined in 2016, by 2.3% and 7%, respectively. Receipts from the drink tax have continued to decline in 2017 while the entertainment portion of the tax was up by 13% through July 2017, more than offsetting drink tax losses.
STILL-SOUND DEBT SERVICE COVERAGE
Despite revenue declines, pledged revenues of $29 million in 2016 provided still sound coverage of annual debt service at 1.85x, down from 1.9x in 2015. Through July 2017, pledged revenues have declined 2.2% year over year, incorporating a decline in casino occupied room nights although hotel occupancy rates continue to increase.
Competitive pressures are expected to continue, resulting in negligible growth prospects for the pledged revenue over time, although more significant declines could pressure the rating. Fitch believes casino performance is likely to be challenged by new properties opening in upstate New York State and Philadelphia in coming years although much of the regional cannibalization has already occurred. Long-term challenges to Atlantic City's casinos are expected to remain over time.
SATISFACTORY RESILIENCY IN DOWNTURN SCENARIO
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers the results of the Fitch Analytical Sensitivity Tool (FAST), using a 1% decline in national GDP scenario, as well as assessing the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the pledged revenue history, FAST generates a 6% scenario decline in pledged revenues. Pledged revenues could withstand a 33% decline, assuming full leveraging to the ABT, or almost 5.6x the scenario output, a satisfactory level of resiliency. A historical 1.5x additional bonds test provides some protection against overleveraging. The 2014 issuance addressed a five-year capital improvement plan and additional near-term capital needs are not expected.
REVENUE STREAM SEPARATE FROM ATLANTIC CITY BUT NOT THE STATE
While the tax is levied by the city, the revenue from the tax is structured so that it should not be treated as city property in the event of a bankruptcy filing by the city. Bondholders have a first lien on the revenue stream prior to its being available to fund operations of the convention center. Under applicable state law, the city may not reduce or abolish the tax as long as any bonds secured by the tax, including the current issue, are outstanding. The state has also agreed to non-impairment of bondholder rights.
Pledged revenue is collected by the state and collections are briefly deposited in the state's general fund prior to allocation to a special revenue fund held by a trustee for the benefit of bondholders, creating a linkage between the state and this bond issue and placing a ceiling on the assigned rating. Revenues are pledged on a gross basis; however, once sufficient funds have been set aside for semi-annual debt service payments, the remaining revenue, up until six months prior to the next semi-annual debt service payment date, is available to fund operations, maintenance, and capital expense of the convention center properties located in the city (Boardwalk Hall, the West Hall, and the 'new' convention center) and other permitted uses of luxury tax revenue under applicable New Jersey law. Such net luxury tax revenues remain subject to the lien of the indenture until spent.
Additional security is provided through a standard debt service reserve fund equal to the lesser of MADS, 125% of average annual debt service expense, or 10% of the proceeds of the bonds.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Feb 21, 2018|
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