Fitch Rates Battery Park City Authority Series 2009A & 2009B Revs 'AAA'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to Battery Park City Authority's (BPCA) $100 million senior revenue bonds, series 2009A and 2009B.

Fitch also affirms its ratings on BPCA's outstanding debt as follows:

--$392 million series 2003A senior revenue bonds at 'AAA';

--$235 million series 2003B junior auction rate securities (ARS) at 'AA';

--$397 million series 2003C junior ARS at 'AA'.

The Rating Outlooks on all of the series are revised to Negative from Stable.

The ratings are supported by current pro forma debt service coverage levels from pledged lease revenues, as well as a sound legal structure to enforce collections. The revision of the Rating Outlook to Negative is based on concerns regarding the potential volatility of pledged revenues due to the national recession, which has had an increasingly negative impact on residential and commercial real estate values, and the contraction of the financial services industry in particular, which may have an especially negative impact on the demand for office and residential real estate in downtown Manhattan, including Battery Park City. The space lease for Merrill Lynch, accounting for 55% of the square footage within the four World Financial Center towers, expires in 2013, and uncertainty regarding the terms of new space leases to replace expiring ones may put additional pressure on the quality of the pledged revenues.

BPCA is a New York State public benefit corporation that owns and manages the infrastructure and site development for Battery Park City, a 92 acre complex of prime office, hotel, and luxury residential condominium and rental apartment buildings in downtown Manhattan. Pledged revenues are payments in lieu of real estate taxes (PILOTs) and certain other components of rent from commercial leases of the World Finance Center (WFC), Goldman Sachs headquarters, and the New York Mercantile Exchange (NYMEX); 30 residential subleases consisting of various condominium and rental apartment buildings; and two hotel leases.

The WFC towers 1, 2, and 4 are leased by BPCA to various subsidiaries of Brookfield Properties (Brookfield, rated 'BBB' by Fitch) through 2069 (30 years past the final maturity of the bonds). WFC tower 3 is leased through 2069 to Brookfield and American Express Bank Ltd (American Express) as joint tenants. Brookfield subleases most of its space to other tenants including Merrill Lynch & Co. (Merrill Lynch), Cadwalader Wickersham & Taft LLP, Deloitte & Touche LLP, Nomura Holding America Inc, the Securities and Exchange Commission, Royal Bank of Canada, and Mass Mutual Life Insurance. These subleases 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 subtenants, its ability to make lease payments may be affected by the terms of the future subleases. The NYMEX facility provides a less significant contribution to pledged revenues and the space comprising its trading floor is not subject to any PILOT or rent through 2017. Goldman Sachs will begin occupying its space by the end of 2009, although its tax credits are expected to offset any PILOT payments through 2013. Residential property subleases include Gateway Plaza, a rent stabilized apartment building with 1,712 residential units and 29 other subleases totaling 3,203 market rate rental units and 3,969 condominium units. The hotel leases are to Embassy Suites (463 rooms) and Ritz-Carlton (298 rooms).

Pledged revenues are currently derived approximately 55% from the office properties, 40% from residential properties and 5% from hotels. It is projected that over the life of the bonds, the revenues from the residential properties will eventually contribute over slightly 50% of the pledged revenues. The bulk of pledged revenues (76%) are from PILOTs, which have a moderate degree of volatility due to changes in assessed valuations, which can be offset to some degree by changes in tax rates. The remaining pledged revenues are from base and supplemental rent (24%), which are contractually based but subject to renegotiation.

Revenue collection is bolstered by the right of BPCA to take the leased space (including improvements), free and clear of any mortgage lien, in the event of an uncured default by a lessee. This provides an added incentive for the lessee to pay, or a mortgage lender to cure, a lease default. Collection protection is less strong for 12 of the 18 condominium leases, given a New York State Court of Appeals decision that foreclosure by a first mortgagee of a residential property owner extinguishes BPCA's lien on the unit's accrued rental arrears. Collections on residential properties in the event of non-payment may also 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, so BPCA would need to seek redress from the individual defaulting property owners. Additionally, if BPCA were to become the owner of a condominium unit, it would become liable for any common charges payable to the condominium board.

Debt service is paid from pledged revenues net of operating expenses. Pledged revenues in 2009 are expected to be $193 million. This has grown at an average rate of 3.6% over the last five years due in part to seven new residential leases. Operating expenses are expected to be $27.4 million in 2009; this is actually down from $29.5 million in 2003. Based on expected 2009 financial results, pro forma coverage was 3.1 times (x) debt service for the senior bonds, and 2.1x debt service for all debt. A debt service reserve is funded at maximum annual debt service.

The series 2003A, 2009A, and 2009B senior bonds are fixed rate. The series 2003B and 2003C are junior ARS; the series 2003C ARS are synthetically fixed through an interest rate swap. The current $100 million offering will raise BPCA's senior debt outstanding to $492 million. BPCA's debt service schedule had been somewhat frontloaded, and while the current financing will raise near-term debt service payments slightly, the major effect will be in years 2032-2039, with the result being a more level debt service schedule through final maturity.

BPCA's future internal capital needs are limited, and this is an important consideration in Fitch's analysis. However, New York State has announced that it is asking BPCA for a transfer of $300 million, which would require approval from BPCA's board, as well as NYC's mayor and comptroller. Should the request be approved, BPCA is expected to partially fund this through a $250 million additional bonding that is not included in the current plan of finance. Debt service coverage from pledged revenues, including the $100 million 2009 series A and B financing, is well above BPCA's additional bonds test of 2x debt service coverage for senior bonds and 1.55x coverage for senior and junior bonds, or rating affirmation; however, if actual coverage approached those levels it would be viewed as a negative credit factor in Fitch's analysis and could be cause for a rating downgrade. The potential additional $250 million in bonds being requested by the state, if issued, could be structured as subordinate to the current bonds outstanding, although definitive plans have not yet been made.

Additional information is available at 'www.fitchratings.com'.

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