Fitch Affirms NYC Industrial Development Agency Revs (Terminal One Group Association. LP) at 'A-'

NEW YORK--()--Fitch Ratings affirms the 'A-' rating on $258.56 million New York City Industrial Development Agency's special facility revenue bonds, series 2005 (Terminal One Group Association, L.P. Project; TOGA). The Rating Outlook is Stable.

The 'A-' rating reflects a strong demand profile for the project with increasing diversity from contract based foreign-flag carriers, favorable enplanement and cost trends, manageable capital needs, low project leverage and stable cash balances. The single facility nature of the terminal project and ongoing competitive pressures at neighboring terminals present some longer term risks.

KEY RATING DRIVERS

Expanding International Traffic Profile Despite Competition: Revenue Risk - Volume: Midrange

Terminal One at JFK International Airport (JFK) has a proven operational history since opening in 1998. Enplanements were 2.75 million in 2013, up an impressive 16.1% from 2012. Approximately 37% of enplaned passenger traffic is derived from the project's four signatory airlines (Air France, Japan Airlines, Korean Airlines, and Lufthansa) that are also equity holders in TOGA, and the remaining 63% is derived from 19 contract carriers. New York City has a strong market for air traffic and ranks as the largest international gateway airport in the U.S. Competition risk is more acute for contract carriers given the existence of other international terminals within JFK and other NY area airports.

Solid Cost Recovery Framework: Revenue Risk - Price: Stronger TOGA has demonstrated a stable framework for debt repayment. The legal structure provides an unconditional and irrevocable obligation by TOGA to make lease payments equal to debt service without set-off or abatement. The repayment obligation is joint-and-several between all four TOGA partners with full step-up provisions in case of delinquencies or default. While the blended cost per enplanement at the terminal is relatively high at $41.75, the signatory carriers are benefitting with lower overall costs under $18 per enplanement.

Conservative Debt Structure: Debt Structure: Stronger

The project bonds are fixed rate and are solely secured by lease payments without recourse to other terminal-related revenues or to the Port Authority of New York and New Jersey itself. Additional legal security is given over both a 25% operating and maintenance reserve and a 25% annual debt service rolling coverage account. These accounts are supplemented by a fully cash-funded debt service reserve fund held by the trustee. Debt Structure: Stronger

Manageable Capital Needs: Infrastructure & Renewal Risk: Stronger

Since 1999, TOGA has made over $69 million in capital investments and project delivery has been successful to date. Most recent projects completed include concession area enhancements, gate improvements to handle A380-gauge aircrafts and a new $55 million central baggage inspection system. TOGA's contribution of $18 million for the baggage system can be covered from rates to carriers although additional grant reimbursement requests may remove much of the remaining TOGA share of costs.

Stable Cost Structure and Financial Profile: Additional revenues from contract carriers, concessionaires and interest earnings subsidize costs to signatory carriers. Signatory airline costs, including those for ramp operations, at $17.43 per enplanement in 2013, have been declining due to the growth in other revenue sources. No major capital expenditures are necessary, was approximately $10 million budgeted for 2014. However, the company is considering an expansion in the adjacent terminal two property. Costs and financing plans are not yet known. A project of this scale may have rating implications.

RATING SENSITIVITIES

Positive: A continuation of favorable changes in terminal traffic while carrier diversification being maintained could warrant an upgrade;

Negative: While not expected in the near term, an upward shift in the terminal's cost structure or weaker non-aeronautical revenue generation than forecast could negatively impact the credit profile;

Negative: Any further significant construction works at the terminal be funded by TOGA, increasing its leverage profile could lead to a downgrade.

Peer Analysis

The nearest comparable peer to TOGA is JFK's International Air Terminal (IAT or Terminal 4) which operates under a similar relatively unique business model as TOGA and competes for New York international travel with other terminals at JFK and Newark Airport. TOGA is currently less leveraged and less single carrier concentration relative to IAT. However, TOGA has a smaller operating scale with a 2013 overall enplanement base that is less than half to that of IAT.

CREDIT UPDATE

Terminal One opened in the fall of 1998 and serves as an essential facility for a number of the world's leading international carriers. The pattern of traffic levels has been demonstratively positive through most years in operation. In 2013, aggregate enplanements were 16.1% higher than 2012 at 2.75 million, the highest recorded level since opening. Signatory carrier enplanements have remained broadly stable over the past few years at around 1 million, and Air France remains the largest carrier at the terminal with over 474,685 enplanements in 2013, equating to just 17% of the terminal's total. However, enplanement growth has largely been driven by the expansion of globally diverse contract carriers such as Alitalia, Turkish Airlines, Aeroflot and Aero Mexico.

Overall, facility operations are sound with stable activity and limited ongoing capital investment. Notable improvements made in recent years include the ability to handle A380 gauge aircrafts at up to four of the terminal's 10 active gates as well as a $55 million new in-line baggage system. Future capital improvements are modest and are expected to be funded without additional borrowings as airlines directly cover these costs through rate setting mechanisms.

Competition for foreign-flag carrier exists within JFK, particularly from Terminal Four, the largest JFK facility for international traffic serving over 30 carriers and 6.5 million enplanements. However, Fitch would expect the greater New York region to remain relatively affluent, and to remain an economically and culturally important center that is likely to preserve its dominant position for international travel, and therefore that sufficient demand is likely to remain to sustain TOGA's performance.

TOGA generated operating revenue collections of $119 million in fiscal year (FY) 2013, 17% of which was derived from signatory carriers, with 60% coming from contract carriers and remaining revenue coming from concessions and other revenue sources. Although revenue derived from contract carriers and concession tenants are not pledged to bondholders, Fitch views these revenues as important in its credit analysis since they provide a material subsidy to the obligations of signatory carriers. In recent years, contract carrier and concession based revenues has grown significantly reflecting the positive demand profile and expanded concession outlets which have enhanced passenger spending.

From a cost perspective, Terminal One has produced net cost profile that has been much lower than originally projected and has proven attractive in retaining contract carriers. Terminal costs for the signatory carriers fell to $3.09 per enplanement in FY 2013 as compared to $15.56 in FY 2012. The significant change reflects the impact of expanded contract carrier traffic and revenue contributions. When net costs for ramp operations are included signatory carriers, the overall costs were still favorable at around $172 per enplanement. On the other hand, contract carrier costs average over $40 per enplanement bringing an overall blended airline cost at about $34 per enplanement.

The financial position of the TOGA operations is sound, exemplified by moderate leverage of 5.34x net debt to cashflow available for debt service in FY 2013; its financial position is enhanced through solid liquidity support in the form of healthy fund balances including a cash funded debt service reserve maintained at maximum annual debt service, and a separate unencumbered cash reserve balance of $23.2 million. TOGA is required to keep fund balances equal to 125% of annual debt service requirements at year end. At these levels, Fitch believes that TOGA has adequate liquidity capacity to handle adverse events such as a signatory carrier loss or an unanticipated sharp decline in demand.

TOGA is a New York limited partnership established to lease, finance, construct, maintain, and operate the new Terminal One facility. TOGA's general partner is Terminal One Management, Inc. (TOMI), and its limited partners are the signatory airlines: Air France, Japan Air Lines, Korean Air, and Lufthansa. TOMI shareholders consist of the four signatory carriers and each is obligated to pay all Terminal One costs, including debt service; this obligation is joint and several and provides a pro rata step-up provision.

SECURITY

Facility rental payments made by the lessee, TOGA, secure the series 2005 special facility revenue bonds.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=889494

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Contacts

Fitch Ratings
Primary Analyst
Seth Lehman, +1 212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Committee Chairperson
Chad Lewis, +1 212-908-0886
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Seth Lehman, +1 212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Committee Chairperson
Chad Lewis, +1 212-908-0886
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com