Fitch Downgrades NJ Casino Reinvestment Development Authority Bonds
Posted on: November 1, 2020, 12:04h.
Last updated on: October 30, 2020, 04:37h.
Fitch Ratings has downgraded approximately $215 million worth of bonds issued by the New Jersey Casino Reinvestment Development Authority (CRDA).
The credit agency lowered its CRDA rating from BBB+ to BBB. BBB ratings indicate a low default risk, but “adverse business or economic conditions are more likely to impair this capacity.”
The downgrade of CRDA’s luxury tax revenue bonds to ‘BBB’ from ‘BBB+’ reflects the severity of pledged revenue declines in 2020, the likely slow trajectory of the recovery for casino and other entertainment activity in Atlantic City, and thus luxury tax receipts, and the resulting higher vulnerability of the structure to revenue volatility in the near term, relative to our pre-pandemic expectations,” Fitch said in its note.
Founded in 1984 by the New Jersey State Legislature, the CRDA facilitates economic and community development throughout Atlantic City by leveraging assets and revenues with private investment capital.
City Casinos Struggling
Fitch explains that its downgrade on the CRDA bonds is due to the economic damage Atlantic City’s nine casinos are enduring as a result of COVID-19. The gaming floors continue to operate at a maximum 25 percent capacity, and beverages must be consumed while seated.
Brick-and-mortar gross gaming revenue (GGR) in September totaled $190.5 million. That’s a 15.1 percent drop compared with September 2019.
The CRDA is funded through a 1.25 percent Investment Alternative Tax on GGR. Casinos additionally share a “luxury tax” with the CRDA that amounts to nine percent of their hotel revenue, three percent on alcohol sales, and nine percent on entertainment receipts.
With gaming and overnight stays down, and concert entertainment nonexistent, the CRDA is expected to see its income drop.
“Despite the severe revenue shock and resulting narrower resilience, the resumption of taxable activity at a reduced level suggests that recovery is underway,” Fitch reasons. “The Negative Outlook at the ‘BBB’ rating level reflects heightened uncertainty about the strength of taxable activity through the recovery period and the vulnerability of receipts to further pressures, including those posed by prolonged public health concerns.”
Internet gambling in New Jersey has skyrocketed during the coronavirus pandemic. COVID-19 closed Atlantic City’s casinos from mid-March to early July.
Through September, internet GGR is up more than 102 percent, the online casinos winning $685.6 million. That’s a whopping $346.5 million more than the interactive platforms won during the same nine months in 2019.
While internet gambling has helped offset some of the land-based casino losses, there are concerns that some of the play that moved from brick-and-mortar to the computer will be permanent. That segment loss will reduce hotel, alcohol, parking, and entertainment revenues, and the CRDA’s associated taxes.
“Long-term growth of pledged receipts have long been viewed as weak by Fitch, given historical demand and revenue trends over time, and influenced by the impact of competing gaming options from nearby regional casinos outside New Jersey, online gambling and sports betting,” Fitch concluded.