Atlantic City Mayor Don Guardian was able to negotiate a last-minute deal with Bank of America, buying the city six more months to pay off more than $12 million in debt.
On Tuesday, the lender offered the city a line of credit to refinance millions borrowed for coastal sea wall and boardwalk repairs in the wake of hurricane Sandy. Those projects are expected to begin in the spring.
But city officials originally financed the projects with a loan from the New York investment firm Alpine Woods Capital Investors, and the full payment was due on Tuesday.
In light of recent news, finding a refinancing partner for the $12.8 million loan by Tuesday was a tall task.
Gov. Chris Christie’s appointment last month of an emergency manager and bankruptcy consultant to help repair the city’s finances prompted Standard & Poor’s Rating Service to join Moody’s Investors Service in downgrading the city’s credit to “junk” status.
“What all of these things mean is that there’s a very high level of uncertainty with regard to how investors are looking at this credit, and what the future is going to look like in a month or two, if not six months from now,” said credit analyst Tom Kozlik with Philadelphia-based Janney Capital Markets.
What those things meant for Atlantic City, according to Mayor Don Guardian, is that settling on Bank of America’s offer, with an interest rate three times higher than the previous lender, became the only viable option.
“We put out the $12 million, nobody is interested,” Guardian said. “Then we had one taker for 12 percent. We were not willing to pay that much. We had a second interested party. We didn’t get down to what their percentage was, because they wanted support of the state, and we weren’t interested in doing that.”
Top-rated cities typically pay around 2.5 percent for these types of loans.
Credit analyst Kozlik said refinancing debt obligations is not uncommon in the world of municipal finance. Often called a “revenue anticipation note,” it allows a city government to roll over on a payment until there’s enough money to make a payment.
Kozlik noted, however, that the circumstances surrounding the unfavorable view of the city’s credit puts Atlantic City in a specialized category.
Here’s the city’s plan for eventually squaring away the whole $12.8 million:
Guardian said a federal grant, which the city is still waiting for, is anticipated to cover around $10 million of the borrowed money. Atlantic City officials on Tuesday agreed to pay $800,000 of the loan out of the city’s coffers. It’s not yet known how the remaining $2 million will be paid back.
City officials are hoping the federal grant comes through before Aug. 4, when the Bank of America loan is due. Otherwise, Guardian will have to again go lender shopping.