NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the Port Authority of New York and New Jersey's (PANYNJ) $236.405 million 199th series consolidated bonds. The Rating Outlook is Stable.
The ratings reflect PANYNJ's mature, diverse and monopolistic transportation infrastructure asset base that provides critical service to the strong New York City metro area, supported further by a conservative debt structure. Its extensive capital plan and certain loss-making assets constrain the rating. Moderate leverage of around 8.5x (senior) and 9.5x (junior) is mitigated by robust debt service coverage ratios (DSCR) that average around 1.9x (senior) and 1.8x (junior) in the rating case, and are consistent with a 'AA' category rating according to criteria. Ramp-up of the World Trade Center (WTC) site has been encouraging.
KEY RATING DRIVERS
Resilient Revenue Base: Revenue Risk - Volume: Stronger: PANYNJ's portfolio of monopolistic, expansive and diverse transportation and real estate assets includes the four metro New York airports, interstate road, rail and ferry Hudson River crossings, and seaports. The region's diverse and populous economy as well as its status as a global center for commerce supports resilient demand and pricing power. Economic pricing flexibility may fall if WTC or Port Authority Trans-Hudson (PATH) transit assets underperform or if PANYNJ takes on additional loss-making assets.
Demonstrated Rate-Setting Flexibility: Revenue Risk - Price: Stronger: PANYNJ benefits from strong airport cost recovery in airline use agreements and proactive toll increases on its bridges and tunnels with minimal impact on traffic levels.
Extensive, Growing Capital Plan: Infrastructure Development/ Renewal Risk: Midrange: PANYNJ's current 2014 - 2023 capital plan totals approximately $27.6 billion, although Fitch understands that a revised 2017 - 2026 plan is expected to be published before year-end that will reflect additional commitments relating to the Gateway Project and Port Authority Bus Terminal amongst others. Cost and delay risk are meaningful for a plan of this scale and complexity. PANYNJ's target capital investment funding balance of 60:40 cash: debt (currently around 50:50) is appropriate for its financial profile.
Conservative Debt Structure: Debt Structure: Stronger (Senior)/ Midrange (Subordinate): The authority maintains a nearly 100% fixed-rate, fully amortizing capital structure. The subordinated nature of CP and PANYNJ's Goethals Bridge and 4 World Trade Center payment obligations behind the consolidated bonds results in a midrange score for these obligations.
Financial Metrics: DSCR is robust, expected to remain above 1.80x for consolidated bonds and 1.60x for subordinated special obligations in the Fitch rating case through 2020, which primarily reflects slower ramp-up of rental activity at the World Trade Center. Leverage is moderate, with net debt-to-cash available for debt service (CFADS) in the Fitch rating case remaining around 8.1x to 8.6x at the senior level and 9.1x to 9.6x at the junior level.
Peers: Closest peers are Port of Seattle ('AA'/Stable Outlook) and Massachusetts Port Authority ('AA'/Stable Outlook), both of whose debt is secured primarily on airport and port revenue streams. PANYNJ's diverse and high profile asset base is a significant strength; however, its significantly more involved capital plan coupled with a highly politicized operating environment place its ratings one notch below senior lien ratings for both peers.
Negative: Slow revenue growth and/or higher rates of growth in operating expenses.
Negative: Significant escalation in capital needs and additional leverage not supported by revenue increases that cause DSCRs to remain below 1.8x/1.7x on a sustained basis at the senior and subordinated levels, respectively, or net leverage on total debt to remain above 10x for a prolonged period.
Negative: Significantly lower revenue than currently forecast from the World Trade Center site as a result of weaker rental demand, or a widening in sustained operating losses generated on the Port Authority Trans-Hudson transit network.
Negative: Political Intervention: Actions by either the state of New York or New Jersey to limit the authority's ability to raise tolls to cover growing debt service obligations, or significant new non-core state-mandated investment that puts additional strain on cash generative core assets.
Positive: None expected for the foreseeable future on account of PANYNJ's large capital plan.
PANYNJ is issuing $236.4 million 199th senior lien consolidated bonds. This bond issue was sold on a direct placement basis on November 1, 2016 with scheduled maturities from 2022 to 2031.
Operating performance during FY2015 was robust - gross operating revenue increased to $4.82 billion from $4.48 billion in 2014 (an increase of 7.7%), reflecting increases across all its main business segments - tunnels, bridges & terminals (TB&T) - saw gross revenue increase by 11%, PATH by 9%, aviation by 2%, and port commerce by 10%. Notably, revenue generated by the World Trade Center grew 141%, with ramp-up of the site broadly progressing in line with expectations.
Operating expenses for 2015 decreased by 1% to $2.9 billion versus the year prior, with significant expense reductions across its TB&T, aviation, PATH and development facilities more than offsetting a $66 million increase in World Trade Center operating expenses as the site transitioned towards full operations. The 1% decrease was in contrast to the 12.6% increase between 2013 and 2014, reflecting clear-up costs relating to, among other things, the severe winter of 2014 and significant cost increases at World Trade Center.
Year-to-date unaudited results through September 30, indicate mostly positive operating trends noted by a 4.6% increase in aviation activity, 3.0% increase in TB&T transactions, 3.8% increase at PATH passengers offset by a 2.7% decline in container throughput in the port division. On the revenue side, gross operating revenues increased 6.8% to $3.83 billion. All major operating divisions had revenue growth: Aviation (+3.8%), TB&T (+10%), PATH (+6%), WTC (+26.4%) and Ports (+3.1%). Biggest drivers were toll increases at bridges/tunnels and PATH as well as higher traffic at airports and more leasing revenues at WTC.
PANYNJ's current approved capital investment plan spans the period 2014 - 2023, and totals $27.6 billion over this period. Fitch understands that PANYNJ is currently working on an update to this plan that will involve an extension to 2026, partly motivated by the need to incorporate elements of the Gateway Project for which it is partially responsible as well as the Port Authority Bus Terminal project, among others, neither of which are reflected at all in the current capital investment plan. Although neither project has been fully budgeted nor, in the case of the Gateway Project, has it been established how responsibilities with respect to funding or project delivery will be divided across PANYNJ, USDOT, Amtrak, NJ Transit and the states of New York and New Jersey, we expect both projects to be substantial and PANYNJ's responsibilities large.
On the back of strong operating performance, financial metrics remained robust. Fitch-calculated senior DSCR was 2.04x and junior DSCR was 1.83x - both marginally lower than the prior year (2.11x and 1.86x, respectively), largely reflecting lower capitalized interest adjustments in 2015. Fitch notes that authority coverage calculations, including additional non-operating revenue items, are .35x to .40x above the Fitch adjusted results. Senior ND/CFADS (reflecting general reserve fund and consolidated bond reserve fund) was 7.9x while junior leverage (reflecting inclusion of gross debt secured on subordinate special payment obligations) was 8.9x.
PANYNJ financial projections reflect modest traffic growth assumptions across its main business areas. No further toll or fare increases are reflected for TB&T or PATH, with other business segments expected to see inflationary price growth. One WTC occupancy is expected to reach its stabilized occupancy level of about 92% by 2019 from its current level of 68% in October 2016. Over this period, rental rates are forecast to grow at just over 3% per annum. Overall operating expenses are forecast to grow between 3% and 4% in 2016 and 2017, largely driven by cost increases at the WTC site as it transitions to being fully operational, before falling to annual growth rates of 1%-1.5%.
Overall, Fitch considers PANYNJ's forecasts to be reasonable. The Fitch base case largely reflects PANYNJ's forecasts, with some minor adjustments to moderate revenue growth and to assume minimum operating expense growth rates to 2.5%. The Fitch Rating Case is designed to largely test lower WTC rental revenue, with 2020 WTC rent being around 14% cumulatively lower in this scenario than in PANYNJ's forecast and incorporate minimum operating expense growth rates of 3.0% over the forecast period.
Both Fitch's DSCR and leverage calculations exclude non-operating revenue except for passenger facility charges. In each of the three scenarios, DSCR remains robust, falling no lower than 1.80x at the senior level and 1.60x with respect to its subordinate special obligations, reflecting the authority's financial flexibility. While leverage is relatively high at around 8.0x to 8.5x at the senior level and 9.0x to 9.5x total, reflecting its significant capital investment obligations, PANYNJ's resilient, granular user base and significant pricing power provide substantial mitigants.
Additional information is available on www.fitchratings.com.
Rating Criteria for Airports (pub. 25 Feb 2016)
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
Rating Criteria for Ports (pub. 17 Oct 2016)
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)
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