Casino Reinvestment Development Authority, N.J. Luxury Tax Bond Outlook To Neg On Casino Closures On COVID-19 Concerns

NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings revised its outlook on the Casino Reinvestment Development Authority (CRDA), N.J.'s series 2014 luxury tax revenue bonds to negative from stable, and affirmed its 'BBB+' rating on the bonds.
The bonds are special obligations of the CRDA secured by a gross pledge of its luxury tax levied in Atlantic City. The tax is composed of a 9% levy on hotel rooms; 3% on liquor by the drink; and 9% on tickets to theaters, exhibitions, and other places of entertainment in Atlantic City.
"We have revised our outlook on the bonds as the result of the governor of New Jersey's executive order temporarily closing all casinos in the state because of the COVID-19 pandemic," said S&P Global Ratings credit analyst David Hitchcock. "Should Atlantic City casinos remain shuttered beyond late summer, or not recover to levels similar to their 2018 activity, we could downgrade the bonds, perhaps by multiple notches," Mr. Hitchcock added.
Until the COVID-19 pandemic hit, revenues had been on the upswing, reversing a prior period of declining revenue, although luxury tax bond debt service coverage had remained good even during the downturn. If historical casino activity can resume, debt service coverage could resume at recently strong levels. Nevertheless, although the governor's order might be temporary, we also we believe the length of time the order could be in effect is uncertain, and once lifted, hotel and gaming activity will likely to take time to fully recover.
While payment of debt service over the next year appears in hand, without resumption of a viable Atlantic City casino and hotel market after COVID-19 restrictions are lifted, we believe there is a potential for significantly lower debt service coverage over our one-year outlook horizon that could lead us to lower the rating.
The 'BBB+' rating reflects our assessment of the following factors:
  • Pledged revenue is generated from an economic base concentrated in casino gaming and tourism and is subject to potential volatility due to the discretionary nature of visitor traffic;
  • Growth in pledged revenue after a period of decline. Luxury tax revenue increased 32.4% in fiscal 2018, boosted by the re-opening of two casino hotels under new names and management. Previous revenue declines were in part due to increased economic competition from casinos in neighboring states, especially Pennsylvania, that made Atlantic City less attractive as a gaming destination; and
  • The fixed nature of the pledged tax rates, which the authority cannot raise.
These weaknesses are partially offset by our view of the following:
  • Strong 2.36x coverage of maximum annual debt service (MADS) in 2018, following good coverage 1.78x coverage in 2017. Coverage increased due to the re-opening under new ownership in mid-2018 of the former Revel Casino as the Ocean Casino Resort, and the former Trump Taj Mahal as a Hard Rock Hotel and Casino Atlantic City (Hard Rock), as well as efforts by the state, local government agencies, and the CRDA to diversify Atlantic City's economy and stabilize the revenue base; and
  • Adequate bond provisions, including a historical 1.5x additional bonds test and a debt service reserve fully funded at MADS.
A revision of the outlook to stable would require the casinos to reopen and produce good debt service coverage. Another unknown is the potential impact on long-term revenue of internet gaming.
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