Last March, the un-elected Atlantic County Improvement Authority agreed to borrow $97 million to build a private water park next to the Showboat in Atlantic City. It will be owned by Bart Blatstein. Blatstein is a Philadelphia developer who owns Showboat in Atlantic City as a non-casino hotel. Blatstein also owns several projects in Philadelphia. Several years ago, he was unsuccessful in trying to revive the failing Ocean One Pier across the Boardwalk from Caesars in Atlantic City.
Shortly afterwards, the Improvement Authority approved the loan, the governing body of Atlantic County (Board of Commissioners, formerly Freeholders) also approved it. They did so after being told that Atlantic County taxpayers could not be held responsible if the project failed. Although that is technically and legally correct, taxpayers are almost always forced to bail out failed projects, even when they have no legal obligation to do so.
The bonds in question are “revenue bonds”. A “revenue bond” is a debt paid back with income from a specific project. It is different from a much more secure “general obligation bond”. General obligation bonds force state and local governments to pay back loans by raising real estate taxes even when a project fails to earn enough money.
However, when a “revenue bond” project fails, it ruins the credit ratings of every government agency in the state. Often financial “experts” warn that bond defaults by government agencies will trigger a “financial crisis”. As a result, New Jersey taxpayers routinely bail out insolvent agencies that default on their “revenue bonds”, even when there is no legal obligation to do so.
In 1992, Republican Governor Christie Todd Whitman bullied Atlantic County into bailing out its Utilities Authority. The Atlantic County Utilities Authority had used “revenue bonds” to borrow $82 million to build a trash incinerator that was supposed to pay for itself. Somehow, the $82 million was spent and the incinerator was never built. Five years ago, Republican Governor Chris Christie and a Democrat State Senate and Assembly bailed out “revenue bonds” of the insolvent NJ Transportation Trust Fund Authority even though they had no legal obligation to do so. They did it by giving us hikes in tolls and gasoline taxes almost every year since 2016.
Last March, the Atlantic County Improvement Authority hired the Wall Street investment bank Janney Montgomery Scott to borrow the money by selling $95 million in “revenue bonds”. Earlier this month, Bloomberg.com reported that Janney was unable to find investors to buy those bonds. Last Monday, Bloomberg reported that the Authority planned to have Citigroup Inc. take over the deal.
According to Bloomberg.com, these “revenue bonds” were “unrated” but paid a high rate of interest. Wall Street investors are usually offered extra high interest when there is extra high risk that bonds from a troubled private corporation or “revenue bonds” from a government agency might not be paid back and lose most or all of their value. Wall Street investors commonly describe these bonds as “junk”. The Bloomberg article reported that these Blatstein Water Park bonds failed to sell “despite surging investor demand for high yield debt” elsewhere.
Yesterday, the Atlantic County Improvement Authority announced it is having a special public meeting this Thursday. They say they plan to replace Janney Montgomery Scott with a new investment bank, Citigroup, Inc. to sell the bonds. According to Bloomberg, “It is rare for borrowers in the municipal-bond market to change underwriters just as a deal is set to price”. Bart Blatstein said Janney would still be part of the transaction. Blatstein’s lawyer, Jeffrey Winitsky said a new underwriter would “give the transaction a fresh perspective and marketing effort”. However spokespersons for Janney and Citigroup declined to comment to Bloomberg.
It also seems unusual that the Authority is not doing any investigation or holding any public hearings on why Wall Street Investors did not want to lend money to this project. If they think the project is too risky for them, should we ask if it is too risky for Atlantic County taxpayers? Is this a sound project? Or is this to reward Blatstein for bailing out Stockton University. In 2014, Stockton University spent $18 million to buy the Showboat Casino when it closed, but was unable to use it because of a restrictive covenant. However, one year later, Blatstein rescued Stockton by paying it $22 million for the building.
It is worth mentioning that proposals to build a waterpark at the abandoned Atlantic Palace Casino at Boston Avenue and the Boardwalk (Steve Wynn’s original Golden Nugget) failed because they could not find enough lenders or investors in 2015, and again in 2017.. What makes this water park project better?
But what will Citicorp do to sell this “junk” that Janny Montgomery Scott could not do? The failed Revel Casino comes to mind. In 2011 Republican Governor Chris Christie and top Democratic leaders in the legislature agreed to support a $1.15 billion loan package to complete the Revel Casino project after the Wall Street firm Morgan Stanley abandoned it. Private investors would loan $850 million, which would be secured by the completed building. New Jersey’s “Economic Development Authority” would sell “mezzanine bonds” to borrow the other $350 million which would be secured by nothing! The Revel Casino was completed and opened in 2012. It was a complete flop and closed two years later. It was sold to Florida developer Glen Straub for $82 million in 2015.
That means “secured” investors who loaned the $850 million got less than nine cents back on every dollar they invested. Those who bought “mezzanine bonds” got nothing. Who lost more than a billion dollars in just two years? Why didn’t any of them sue the banks or brokers who sold them this junk? Why didn’t any of them even publicly complain about their colossal losses?
Later we learned that several hedge funds operating out of Morris County, invested in these Revel bonds. We also later learned that administrators of New Jersey’s public employee pension funds had given these hedge funds hundreds of millions of dollars to invest. We also remember that at least one Republican Governor of a another state publicly complained that our Governor Chris Christie had persuaded him to invest some of his state’s pension money in Revel Casino bonds. Is Citicorp being selected because it has more political juice than Janney? Will Citicorp “persuade” pension fund administrators to invest in Blatstein’s Water Park bonds?
Contact Seth Grossman (609) 927-7333