Will Atlantic City’s Revel be washed away by Sandy?

November 1, 2012

Hurricane Sandy made landfall near Atlantic City, New Jersey, but the damage did not set back the city’s gambling and hotel economy by much. Fitch Ratings reports:

Gaming operators in Atlantic City, NJ, and across the mid-Atlantic region appear poised to re-open properties affected by Hurricane Sandy relatively quickly, limiting the storms impact on cash flow. However, Fitch believes longer term effects on physical infrastructure and consumer sentiment in New Jersey and surrounding states could have a material impact on fourth-quarter gaming demand.

Atlantic City casinos have been challenged by slumping demand since the financial crisis, according to the Wall Street Journal:

New Jersey Governor Chris Christie two years ago pushed through legislation designed to help Atlantic City crawl out of its hole. Among the changes were infrastructure improvements around town, a $30 million “Do AC” marketing campaign and a regulatory structure that is supposed to be cheaper and easier for casino companies to navigate. Gambling revenue this year through September was down 4.8% from a year earlier.

There are some already very financially weak casinos in Atlantic City:

During the downturn, several casino companies have worked their way through bankruptcy proceedings or other restructuring. RIH Acquisitions NJ LLC’s Atlantic Club could close its doors if its lengthy losing streak continues, a person familiar with the matter said.

The first new Atlantic City casino in a decade, the $2.4 billion Revel, has been a disappointment since opening in March. Hoping that the elegant Revel would attract new customers to Atlantic City, Governor Christie granted a $261 million tax-rebate package to the project’s developers midway through construction.

Revel is in desperate shape. Even with a state tax rebate package, the casino is in the process of exchanging $365 million of 12% notes due in 2018. Revel is undertaking this exchange so that interest payments can be rolled into the principal amount outstanding (aka PIK or payment in kind bonds). This is the end of the road for corporate borrowers. By pushing off interest payments into the future, it means that there is very little in fulfilled cash and debt commitments.

I wrote about Revel in May, 2011:

The Revel casino project is a failed investment of Morgan Stanley that was recently refinanced with Governor Christie’s support. The state is committing $261 million to the project and will own a 20% equity stake. NJ.com covered the opposition to the investment:

New Jersey Policy Perspective Executive Director Deborah Howlett questioned how Christie could claim the state is broke while promising hundreds of millions in subsidies.

“When we have to take such deep cuts in our investment in educating our children, in police, in sanitation workers, for Pete’s sake, but we’re still finding hundreds of millions to give to corporations, there’s an imbalance there,” said Howlett, a former spokeswoman for Gov. Jon Corzine, who lost to Christie in 2009.

Whether public entities should subsidize private, for-profit entities with the “hope” of future tax revenues is an important question.

It’s unlikely that Revel will survive it’s blow from Sandy. Standard & Poor’s rates its debt very close to default:

Revel was downgraded to Caa2 from Caa1 in August with sales and earnings at the Revel Resort, opened in May, already at a “significant” discount to what the ratings firm “believed was necessary” to service its debt.

Sandy has done a lot of damage but hopefully it will wash away the willingness of officials to try and prop up private and for-profit entities with public support. In a storm, poorly moored objects are often blown away.

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