NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'AAA' the rating for the following outstanding senior lien revenue bonds issued by Battery Park City Authority, NY (the authority):
Amounts are approximate:
--$56.6 million series 2009A (federally taxable - BABs);
--$31.6 million series 2009B;
--407.1 million series 2013A;
--$6.9 million series 2013B (Federally Taxable Bonds).
The Rating Outlook has been revised to Stable from Negative.
SECURITY
The bonds are special obligations of the authority, payable from pledged revenues that include primarily payments in lieu of real property taxes (PILOTs) from the leasing and subleasing of parcels in BPC.
Bondholders are additionally secured by a debt service reserve fund (DSRF) equal to maximum annual debt service (MADS) funded from bond proceeds.
KEY RATING DRIVERS
IMPROVED LEASING PERFORMANCE: The Outlook revision reflects the successful leasing of a significant amount of vacant commercial space in Brookfield Place (formerly known as the World Financial Center) over the past year. The attraction of new tenants reduces Fitch's concerns about the ability of Brookfield Place to compete with two new state-of-the-art towers at the World Trade Center (WTC) site.
ROBUST DEBT SERVICE COVERAGE: Current pledged revenue provides strong debt service coverage of 4.3x senior lien MADS based on fiscal 2013 pledged revenue. High coverage levels mitigate some of the risk to commercial lease interruption or default, as residential and hotel properties alone provide 1.8x MADS coverage.
EFFECTIVE LEGAL STRUCTURE: The authority has the right to terminate each of the commercial ground leases and recover possession of the premises, including any improvements thereon, in the event of a default by a lessee. This provides an added incentive for the lessee to pay or a mortgage lender to cure a lease default.
PREMIER LOWER MANHATTAN LOCATION: The project area from which pledged revenues are generated is situated on the Hudson River waterfront in downtown Manhattan. The project area is a fully developed planned community.
OFFICE BASED EMPLOYMENT CONCENTRATION: Financial service firms occupy a significant share of BPC's commercial space, and U.S. Census data indicate that many of its residents are employed by those or other finance companies in the city. There has been some evidence of diversification in downtown employment but Fitch expects BPC to continue to rely heavily on the financial services industry.
SOUND RESIDENTIAL PERFORMANCE: The residential portion of the project has generally shown steady growth in assessed valuation (AV) and makes up about 44% of pledged revenue. Fitch believes this balance between residential and commercial revenues should help keep revenue adequate in the event of a downturn in either sector. Long-term projections show an increasing portion of pledged revenue will come from residential properties over time, in part due to the expiration of abatements.
LIMITED DEBT EXPECTATIONS: The project area is essentially fully developed, and Fitch expects modest if any additional debt.
RATING SENSITIVITIES
RE-LEASING RISK: An inability to continue to re-lease space as lease terms expire at rents that produce expected levels of pledged revenues could result in a downgrade.
INCREASED LEVERAGE: While not anticipated, significantly increased leverage could negatively affect coverage levels and the rating.
CREDIT PROFILE
BPCA is a New York state public benefit corporation that owns and manages the infrastructure and site development for BPC, a 92-acre complex of office, hotel, and residential condominium and rental apartment buildings situated on the Hudson River waterfront in downtown Manhattan. The fee ownership of the BPC site was conveyed to the authority by the city in 1982 for a nominal consideration. The authority obtains its revenues principally from the leasing of parcels in BPC pursuant to long-term net ground leases. Operating risk is modest as the authority's responsibilities are limited and operating expenses are small relative to total revenue.
STRONG LEGAL STRUCTURE
The legal structure of the ground leases between the authority and each commercial and residential lessee provides additional bondholder security. The term of the ground leases extends well beyond the final maturity of the bonds; thereafter all improvements are scheduled to revert to the authority. Until then, BPCA's credit position as owner and landlord of the project area is senior to all tenants, lenders or mortgagees.
In the event that a commercial or residential lessee fails to make payment of base rent or PILOT to the authority, BPCA has the right, pursuant to the ground leases, to commence the process of taking back the properties. In each case however, any mortgagee who has loaned money to the lessee for improvements to the property has the right to step in to cure the missed payment. While the mortgagees are not required to cure, failure to do so would allow the authority to void the mortgages and the lenders would lose all security interest in the building to BPCA. Under that scenario, BPCA would become the sole owner of the improvements free and clear of any mortgage liens. For the Brookfield Place towers, Brookfield (along with American Express at 200 Vesey Street) is the ground lessee and is obligated to make payments to BPCA even if they have not been paid through reimbursements from lessees.
Collections on residential properties in the event of non-payment may be complicated by a time-consuming eviction process, and even more so for the condominium associations, whose boards are not responsible for payment defaults by individual unit owners. In the event of a default, BPCA would have to seek redress from the individual defaulting property owners. Additionally, foreclosure by a first mortgagee of a residential condominium owner extinguishes BPCA's lien on the unit's accrued rental arrears, and if BPCA were to become the owner of a condominium unit it would become liable for any common charges payable to the condominium board. The history of lease interruption or default is limited to the withholding of several months of rent by a single residential building during a rent strike in 2001, which had an inconsequential impact on revenue performance.
ROBUST DEBT SERVICE COVERAGE
Debt service is payable from pledged revenues net of operating expenses. Gross pledged revenue totaled $212 million in fiscal 2013, including $162 million (76%) of PILOT revenue. After deduction of the authority's $27 million in operating expenses, coverage of pro forma MADS on senior lien bonds was 4.3x. With no revenue from the office buildings, coverage would still be 1.8x; in a still highly unlikely stress scenario of only one-half of revenue from office buildings, coverage would be 3x. Pledged revenue declined slightly in fiscal 2013 from the prior year. Fitch does not believe this decline is the beginning of a trend, as billable AV (from which pledged revenue is derived) is expected to show a solid increase for fiscal 2015 after declining slightly in fiscal 2014.
Under the indenture, additional senior lien leveraging is permitted upon satisfaction of an additional bonds test (ABT) which requires 2.0x coverage. An important consideration in Fitch's analysis is the absence of material leveraging plans and the maintenance of annual debt service coverage levels at least at the authority's internal targets of 3.0x senior debt. The authority reports no planned debt issuance. A total of $610 million in junior lien variable rate debt (not rated by Fitch) is currently outstanding. The junior lien is subject to a 1.55x ABT.
FAVORABLE PROJECT AREA PROFILE
BPC's six office buildings total 10.7 million square feet (msf) of commercial space. They include four towers at Brookfield Place, which are leased by BPCA to various entities affiliated with Brookfield Financial Properties (Brookfield, not rated by Fitch), the New York Mercantile Exchange (NYMEX, the leasehold interest for which was recently purchased by Brookfield from the NYMEX's owner) and 200 West St (leased by Goldman Sachs for its headquarters). The last, at 2.2 msf, was completed in January 2010 and represents the last major element of the BPC development plan. Other large tenants in the complex include American Express, Cadwalader, Wickersham & Taft, Willis, CommerzBank AG, Oppenheimer & Co., and Royal Bank of Canada. Recent leases for significant amounts of space have been signed by Time Inc., Jones Day, and Bank of New York Mellon.
The BPC community also includes more than 10 msf of residential development. The final two residential properties were completed in 2011, bringing the total number of rental and condominium units within the project area to 4,967 and 3,648, respectively. The residential units, contained within 30 buildings constructed since 1980, are substantially occupied according to the authority. BPC has an estimated population of 14,130 residents exhibiting well above average educational achievement and income metrics.
The project area has several retail shops and restaurants, 20 works of public art, several museums (including the Museum of Jewish Heritage), Embassy Suites and Ritz-Carlton hotels, a multiplex cinema, three public schools (including Stuyvesant High School), a marina, and approximately 36 acres of parkland and open spaces. Revenues from the retail development are not pledged to bondholders. Brookfield is in the process of a $250 million renovation of the retail and public spaces within the commercial portion of the project.
The resilience of the area is perhaps best illustrated in its successful recovery from the events of September 11, 2001. More recently, the impact of Hurricane Sandy does not seem to have affected residential occupancy rates, although it is unclear if the storm has had an impact on the desirability of the commercial space. The authority reports modest damage which was repaired with private insurance and FEMA funds.
TENANT PERFORMANCE & ROLL-OVER RISK
Three of the Brookfield Place towers are leased to Brookfield through 2069 (30 years following final maturity of the bonds). Brookfield recently purchased the leasehold interest in the NYMEX building from CME Group Inc., the owner of the NYMEX, and will reportedly lease about 43% of the building back to NYMEX for 15 years. The purchase further concentrates Brookfield's interests in the area but also solidifies the company's commitment to it. 200 Vesey Street (formerly known as Tower 3) is leased through 2069 to Brookfield and American Express Bank Ltd (American Express) as joint tenants. The Goldman headquarters and the NYMEX building represent the remainder of the commercial office space within the project area.
Brookfield leases some of its space to various commercial tenants, who may elect to sublease space to other tenants. All leases expire before the final maturity of the bonds, and while Brookfield's obligation to make lease payments to BPCA is not contingent on the renewal or replacement of a tenant or subtenant, its ability to make lease payments may be affected by the terms of the future leases.
Leasing conditions and outlook have improved notably over the last year. Bank of America/Merrill Lynch (BAML) at that time was the largest tenant at Brookfield Place, occupying most of 225 Liberty Street and 250 Vesey Street (formerly referred to as towers 2 and 4). Some of BAML's leases terminated Sept. 30, 2013, leaving 2.7 msf vacant. Since then Time Inc., Lord Day, and Bank of New York Mellon have signed leases through at least 2032 for significant amounts of space. Rents for the BNY Mellon space appear comparable with market rates, even with a state subsidy, although information on potential subsidies by Brookfield is not available. No public information on rents or subsidies is available for the other two leases. Nevertheless, expected combined commercial occupancy at Brookfield Place has improved significantly, up to 88% from 78% a year ago.
The procurement of major leases reduces Fitch's near-term concerns about Brookfield Place's ability to compete with the 8.7 msf of additional commercial space to be provided shortly by two state-of-the-art TWC towers. While Brookfield Place has direct waterfront access, the WTC buildings will be closer to transportation lines. State subsidies raise concerns about Brookfield's ability consistently to obtain market rents but Fitch believes they also demonstrate the state's interest in supporting the health of lower Manhattan and Battery Park City. The next lease expiration of significant size is in 2020.
REVENUE COMPOSITION AND FORECASTS
Commercial properties account for approximately 52% of fiscal 2013 gross pledged revenue, residential properties 44%, and the remainder hotel properties. PILOT revenues are based on the billable AV of the premises, any tax abatements, and the tax rate as determined by New York City. A 2103 analysis by CBRE for the authority shows commercial and residential PILOT revenues growing moderately over the life of the bonds. Residential PILOTS are based on historical growth in billable AV, tax rate increases, and gradual expiration of abatements. Commercial PILOT revenue takes into account abatements that will expire in 2016.
Property assessments are subject to appeal by a lessee, although Fitch believes this risk is modest based on the history of appeal resolution. The authority reports that outstanding appeals are consistent with historical trends. A number of appeals are pending both at the administrative and court levels.
Commercial and residential rent revenue account for approximately 24% of pledged revenues. Rents are contractually fixed and are not subject to adjustment in any event other than default of a lease. Periodically the authority may be approached by a tenant seeking rent relief or modification. The authority is not obligated to entertain such requests. Conversely, there is no constraint (including any debt service coverage test) upon the authority's discretion regarding performance, enforcement or termination of subleases or upon the operation and maintenance of the project.
NYS & NYC BUDGET EXPOSURE
In 2010 the authority agreed to pay from available excess resources $200 million each to New York State and New York City for the purpose of reducing then existing budget gaps. Additional allocations from the authority which are funded with debt could have negative rating ramifications.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=877514
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