Atlantic City lifted to investment grade by Moody's

Atlantic City, New Jersey, is back in the investment-grade graces of Moody's Ratings.

The rating agency Tuesday upgraded the seaside casino city's issuer rating to Baa3 from speculative grade Ba1.

The city has about $230 million of debt outstanding.

"The upgrade to Baa3 recognizes the city's fiscal stability under the current casino taxation format, as well as a trend of rapid debt defeasance," Moody's said in a news release.

The previous positive outlook was removed in connection with the upgrade, and no new outlook was assigned.

The rating "captures a solid balance sheet with good reserves and modest leverage," Moody's said. "A decade after its financial crisis, the city now has stable operations and has been defeasing debt rapidly."

The rating agency cited positive effects of a casino tax revenue structure that will expire at the end of 2026 without state legislative action.

"The rating therefore balances a currently sound credit profile against the uncertainties of how casinos might be taxed if this framework expires, and the volatility that could introduce to the city's revenues," Moody's said.

As it stands now, about 40% of the city's revenue consists of casino payments in lieu of taxes or internet gambling tax revenues, and the city has proven its ability to maintain solid reserves in this structure, the rating agency said.

"This mix of casino revenues is an obvious improvement over the prior system, under which the casinos paid property taxes. Regular challenges to casino property tax valuations forced the city to pay hundreds of millions of dollars in tax refunds, which is what triggered its financial crisis in the first place," the rating agency said.

An upgrade could follow if there is a permanent extension of the present casino tax revenue structure, or another revenue structure that would protect the city from the volatility of the casino industry, Moody's said, or a diversification of the local economy beyond gambling.

The rating would be vulnerable to a downgrade, Moody's said, if the current casino tax framework expires and places casinos back onto the property tax rolls, or there is a significant fund balance decline or a significant decline in the local gambling industry.

S&P Global Ratings assigns a speculative-grade BB-plus underlying rating to the city's general obligation bonds. Bonds supported by the New Jersey Qualified Bond Act continue to carry investment-grade ratings based on the state backstop.