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Atlantic City water utility cut to junk on restructuring concern-S&P

By Hilary Russ

April 21 (Reuters) - Atlantic City's independent public water utility had its credit rating downgraded four notches to junk on Thursday because of uncertainty about whether it would be dissolved or restructured to generate money for the nearly insolvent New Jersey city.

The revenue bonds issued by Atlantic City Municipal Utilities Authority were cut to 'B-' and placed on creditwatch negative by Standard & Poor's Ratings Services.

The utility is caught up in Atlantic City's spiraling fiscal crisis. New Jersey Governor Chris Christie is seeking to take over city operations so the state can break union contracts, sell city assets and make other tough decisions he says local officials have failed at.

City officials last year opposed the state's initial move to control assets and monetize the water system, a measure that accidentally leaked out in a draft memo and angered local officials.

The utility is not actually owned by the city. To sell, lease or privately operate the utility, city officials would first have to agree to dissolve it to bring it under city control. So far, the city council has voted that down.

"Whatever our fate is with respect to the bond market, it is not a result of our effectiveness, our performance, our management or our product delivery," said MUA Executive Director G. Bruce Ward. "We've got this bright star and the shining element in midst of such chaos here. Unfortunately we get dragged along."

Ward questioned why anyone would look to the utility as the asset to fix the problems of other sectors of government.

The utility has 81 employees and a roughly $16 million budget, he said.

If a debt restructuring or negotiated exchange becomes the likely course for the utility, S&P would likely cut its rating even further, to 'CCC' or below, the agency said. That would put it on par with the city's rating, which is 'CCC-".

The MUA last issued $7 million of bonds in 2012. The yield on one of those bonds maturing in 2019 with a 2.15 percent coupon had risen to as high as 5.40 percent in trades earlier this month.

In December, Moody's Investors Service affirmed its B2 rating on the utility's debt, one notch higher than S&P is now and also non-investment grade. Moody's rating affects $7.5 million of the $16.6 million of the MUA's outstanding water revenue debt.

(Reporting by Hilary Russ; Editing by Tom Brown)