OREANDA-NEWS. Fitch Ratings has assigned a 'AA-' rating to the Port Authority of New York and New Jersey's (PANYNJ) $313 million 195th series consolidated bonds and $200 million 196th series consolidated bonds. Proceeds are expected to refund PANYNJ's outstanding consolidated bonds series 143 as well as provide approximately $50 million towards the repayment of outstanding commercial paper (CP) notes and the remainder of the authority's planned capital expenditures.

Fitch has also affirmed the ratings for the authority's existing debt as follows:

--$20.68 billion in outstanding consolidated bonds at 'AA-';
--CP obligations series A, B and C, each authorized up to $250 million at 'F1+';
--Subordinated special payment obligations with respect to the Goethals Bridge Replacement Project and Four World Trade Center at 'A'.

The Rating Outlook on all bonds and non-CP obligations is Stable.

KEY RATING DRIVERS
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.

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 & 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 later in the year 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 / Midrange): 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.

Healthy Coverage, Moderate Leverage: 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-8.6x at the senior level and 9.1x-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.

RATING SENSITIVITIES
Negative: Slow revenue growth and/or higher rates of growth in operating expenses could result in negative rating pressure.
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 to remain above 9x or 10x for a prolonged period at the senior and subordinated levels would reflect a deterioration in PANYNJ's credit profile.
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, would increase pressure on PANYNJ's other assets and could pressure the rating.
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, would be detrimental to PANYNJ's ratings.
Positive: None expected for the foreseeable future on account of PANYNJ's large capital plan.

Transaction Overview
PANYNJ is issuing $475 million 195th series consolidated bonds. Proceeds will be used to refund outstanding 143rd series consolidated bonds, whose current balance is $500 million on June 15, 2016, pay a portion of outstanding CP notes and provide funds for projects as part of its current capital plan. The bonds are expected to sell on or about May 5, 2016.

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. At the same time, operating expenses for 2015 decreased by 1% to $2.9 billion on 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 toward full operations. The 1% decrease was in contrast to the 12.6% increase between 2013 and 2014, reflecting clear-up costs related to, among other things, the severe winter of 2014, the creation of dedicated aircraft rescue and firefighting cadres at various aviation facilities, significant cost increases at World Trade Center and an increase to PATH operating costs related to the Superbowl.

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 Dec. 26, 2014, 'Keep the Region Moving', a special report prepared by the Special Panel on the Future of the Port Authority and jointly commissioned by the governors of New York and New Jersey, was published. The report was commissioned in response to a number of scandals and other stories that have plagued PANYNJ in recent years, in order to 'review and evaluate reforms of the Port Authority's mission, structure, management, operations, and overall guidance'.

Fitch understands that the board has accepted all of the recommendations of the special panel and is in the process of implementing them. We also understand that a search for a permanent chief executive officer is underway. Overall, we take the view that the special panel's recommendations, if implemented, would bring benefits to the authority, not least in refocusing its purpose and attention on regional transportation infrastructure.

On the back of strong operating performance, financial metrics remained robust. Fitch senior debt service coverage ratio (DSCR) was 2.04x and junior DSCR was 1.83x - both marginally lower than the prior year (2.09x and 1.86x), largely reflecting lower capitalized interest adjustments in 2015. Senior Net Debt /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 by 2019 from its current level of 65% in April 2016. Over this period, rental rates are forecast to grow at just over 3% per annum. 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, we consider PANYNJ's forecasts to be reasonable. The Fitch Base Case largely reflects PANYNJ's forecasts, except that we have adjusted revenues to exclude revenue from certain small or miscellaneous business segments such as ferries, regional facilities and programs and other incremental non-toll/fare income, and have moderated revenue projections from WTC. We have also adjusted operating expense growth rates in the years 2018-2020 to 2.5%. The Fitch Rating Case is designed largely to test lower WTC rental revenue, with 2020 WTC rent being around 14% cumulatively lower in this scenario than in PANYNJ's forecast. On top of adjustments made to revenue in the Base Case, the Rating Case also incorporates more moderate interest income assumptions and operating expense growth of 3% over the period 2017-2020.

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 8.0%-8.5% at the senior level and 9.0%-9.5% total, reflecting its significant capital investment obligations, PANYNJ's resilient, granular user base and significant pricing power provide substantial mitigants.