This piece first published May 3, 2016, Debtwire Municipals
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Bondholders for Atlantic City could allow the city access to a USD 18m capital fund to pay debt service due 1 June, said two city bondholders and a New Jersey-based municipal bond counsel.

The capital fund contains proceeds from various previous bond issues, though using the funds for purposes other than those stipulated in bond documents could create many complications. Generally, bond proceeds are restricted to purposes outlined in offering statements.

Bondholders likely wouldn’t object to using the capital fund for debt service, but tapping the fund for operations or other uses may raise a red flag, the first bondholder said.

Given the city’s cash position, bondholders would prefer payment over a monetary default, although bondholders could view the capital fund use for debt service as a technical or covenant default, said the New Jersey-based bond counsel.

“If I were a bondholder, I would rather see a technical default than a payment default,” said the bond counsel.

New Jersey Governor Chris Christie (R) said the city remains at risk of default and he believes the city will be unable to make the 1 June debt service payment. Mayor Don Guardian (R) said he could not guarantee the June payment would be made.

The city’s cash position is precarious and even up for dispute. Christie said the city will be out of cash 10 May, though Chris Filiciello, the mayor’s chief of staff, said Atlantic City will remain solvent through the end of the month.

Bondholders could object to the capital fund draw as an improper use of funds because the draw could compromise the tax status of the bonds, said Marc Pfeiffer, assistant director of the Bloustein Local Government Research Center and a veteran of the state’s Department of Local Government Services (LGS).

However, the issues could be avoided if the move was done via an interfund transfer and if the funds were reconciled by the end of the fiscal year, he said. To access the funds, the city requires LGS approval, which controls the city’s budget and personnel decisions.

“The fund would need to be reimbursed,” said Pfeiffer.

If the money is returned to the proper fund, there’s no problem, said Charles W. Grande, managing director at UBS. But using the funds for an alternative purpose calls into question the legality of the offering and may require a judge to determine if it’s an acceptable use.

“If it’s not the intended purpose, it does become a legal question,” Grande said.

The next debt payment of USD 1.5m is due 1 June, according to calculations by Debtwire Municipals.

The June payment supports USD 62.87m in Series 2013 general obligation and tax appeal refunding bonds. The bonds are not insured.

Filiciello said the city is reviewing all options surrounding the 1 June payment.

If viewed as a technical default, it would have less impact on other New Jersey municipalities, thereby containing the fallout from Atlantic City, said a buy-side analyst.

That’s not to say this solution eliminates questions surrounding the strength of LGS, the analyst said. Traditionally, LGS works to prevent these situations and support distressed municipalities through financial crises.

Other municipalities could remain vulnerable, however, as LGS turns the other cheek with regard to Atlantic City, leaving the market to wonder where else the state would allow this to happen, the analyst said.

The matter is further complicated by the fact that Atlantic City’s bonds don’t have a trustee to help bondholders organize, the attorney said. If they need to challenge the tax status of the bonds, a payment or technical default, or seek a writ of mandamus in the event of nonpayment, it is more difficult to unite.

The city acts as the paying agent, making debt service payments to the Depository Trust Company (DTC), so without a trustee, any remedy or action a bondholder would seek is their own choice, the attorney said.

LGS declined to comment for this story.

Atlantic City is rated Caa3/negative by Moody’s Investors Service and CCC-/negative by Standard & Poor’s.

A USD 2m tranche of Series 2013 general obligation and tax appeal refunding bonds due 2026 last traded in odd lots at 61.35 to yield 11.524% on 3 May.