(Reuters) - Moody’s Investors Service slashed Atlantic City’s credit rating six notches deeper into junk territory on Friday, a day after New Jersey Governor Chris Christie appointed an emergency manager with a mandate to consider a debt restructuring.
Atlantic City has about $344 million of long-term debt outstanding. Moody’s dropped the city’s general obligation rating to Caa1, down from Ba1, indicating that the credit rating agency thinks there is a substantial risk of default over the next five years.
The appointment could spell trouble for bondholders, as the emergency management team has ties to Detroit’s historic bankruptcy.
The order from Christie to consider a restructuring also marks a “rapid, dramatic” change from the usually strong oversight New Jersey provides its local governments, including the requirement that they pay their bond debts, Moody’s said.
“That’s why you see such a steep downgrade here,” said Moody’s analyst Josellyn Yousef.
“This action, this executive order, really pivots that thinking,” she said. “It indicates to us that perhaps in this situation (New Jersey) may not be as willing to provide the local support they have in the past.”
Moody’s spokesman David Jacobson said they could not talk about whether the rating agency had discussed the likelihood of bankruptcy with the state or new management team because any such conversations are confidential.
“I’ve only been in office a short time. I continue to do what is necessary to make Atlantic City economically vibrant, and that goal hasn’t changed,” Mayor Don Guardian said in an email from his chief of staff Chris Filiciello. “Our better days are still to come.”
Moody’s did not discuss the emergency management team with the city before today’s downgrade, Filiciello said.
Moody’s also gave Atlantic City’s GO debt a negative outlook, citing the possibility of a material impairment to bondholders from a debt restructuring.
Christie’s office did not immediately reply to a request for comment.
Moody’s also cut the water revenue debt of Atlantic City’s Municipal Utilities Authority four notches to B2 on Friday, affecting about $18.4 million of debt. The downgrade reflects the authority’s rapidly declining customer base as the casino industry contracts, with four of the city’s 12 casinos closed in 2014.
Reporting by Abinaya Vijayaraghavan in Bengaluru and Hilary Russ in New York; Editing by Joyjeet Das, Alan Crosby and Meredith Mazzilli