Atlantic City’s problems not solved by bondholder haircut or bankruptcy, Lavin says

This piece first published February 4, 2016, Debtwire Municipals
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Targeting bondholders and bankruptcy are not sensible solutions for Atlantic City, former Emergency Manager Kevin Lavin said in an interview with Debtwire Municipals.

Lavin served for a year as Atlantic City’s emergency manager and left the position last month to begin at Ankura Consulting Group, a business advisory and expert services firm. He left the door open to further work with municipalities, a sector that has a “very big need,” he said.

In Atlantic City, the long-term cost of bankruptcy far outweighs the short-term benefit, and the parallel extends to Puerto Rico – in both situations, Chapter 9 does not fix all of the issues, he said.

“The real cost is development of the city,” Lavin said. “People want to invest in the city, but there’s opportunity cost for development with any kind of (Chapter) 9. But it doesn’t make sense. There are a lot of bondholders in Puerto Rico. If you give it (Chapter) 9, it won’t fix the commonwealth. All it does is fix the debt. Atlantic City is the same.”
Instead, the solution should be fixing the city, which has two uncommon assets: the casinos and beachfront property, which are significant drivers of revenue. The goal needs to be development beyond that, Lavin said.

Although some in Atlantic City remain convinced filing for bankruptcy would resolve the city’s troubles, Lavin is skeptical. Chapter 9 could eliminate some of the city’s debt but the annual savings would be insubstantial, he said.

“Hypothetically, if you reduce debt by USD 250m by going through a Chapter 9, the savings in annual debt service would maybe amount to 20m a year, and that is not a material amount in the grand scheme of what we’re talking about with respect to Atlantic City,” Lavin said.

Three months after arriving in Atlantic City, Lavin projected a USD 101m deficit in FY15, which ultimately grew to USD 120m. By the end of his tenure, he projected a USD 400m cumulative deficit through 2020 without operational changes.

The city has USD 337m in general obligation debt outstanding, according to Lavin’s March report, and owes about USD 200m to casinos for property tax appeals, including interest.

Lavin identified about 200 potential areas for operational improvements, including efficiencies with the Atlantic City Municipal Utility Authority, creating county police and fire services and making changes to the way casino properties are taxed in Atlantic City.

That is one item still up for debate in the state legislature. The original bill implementing payments in lieu of taxes (PILOTs) on casino properties received a conditional veto from Governor Chris Christie (R), and a bill implementing Lavin’s recommendations received a pocket veto from the governor, as reported.

State Senator Steve Sweeney (D), in partnership with Christie and Atlantic City Mayor Don Guardian, is authoring a bill giving the state more control of the city’s finances, and that bill is expected to incorporate Lavin’s changes to the PILOT, as reported.

In its original form, the PILOT was problematic as it didn’t offer enough room for growth given that it’s probable that some of the casino valuations will increase in the next decade, Lavin said.

The delays came in part from that question – the PILOT became a political flashpoint with vocal opposition even from locals, including Atlantic County Executive Dennis Levinson.

“People had questions – why give casinos that benefit?” Lavin said. “We were waiting for different things, part of the recommendations needed to be tied to practical solutions and results. I’m not happy at how long it took. I wish it could have been quicker. It’s an extraordinarily difficult situation compounded by the desire of some to have casinos in Northern Jersey. But (Atlantic City) remains in crisis. A lot of discussions and work still needs to happen.”

Moody’s Investors Service rates Atlantic City Caa1/negative and Standard & Poor’s rates the city at CCC-/negative.

A USD 4.68 tranche of city’s 5% Series 2012 general obligation bonds due 2021 last traded in odd lots at 76.576 to yield 10.599%.

 

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