Fitch Rates Port Authority of New York & New Jersey's Commercial Paper Obligations 'F1 '
The rating is supported by PANYNJ's mature, diverse and monopolistic asset base which includes certain very strong airport and bridge/tunnel assets, and are further supported by the authority's conservative debt structure and moderate leverage, with debt service coverage ratio (DSCR) expected to be managed at or above 1.8x. The authority's extensive capital plan and guardianship of significant loss-making assets constrain the rating. However, to the extent that recommendations made by a special panel appointed last year are implemented, a greater concentration on its core mission relating to critical transportation infrastructure in the region would be considered a credit positive.
KEY RATING DRIVERS
Resilient, Stable Revenue Base - Revenue - Volume Risk: Stronger
PANYNJ has a monopolistic position over an expansive, diverse portfolio of transportation and commerce related assets, including four metropolitan New York/New Jersey airports, an interstate transportation network comprising tunnels, bridges, terminals, ferries, and seaports. Strong demand characteristics are underpinned by the region's diverse and populous economy as well as its status as a global center for commerce.
High Rate-Setting Flexibility - Price Risk: Stronger
The authority has demonstrated an ability to produce consistently healthy financial performance, reinforced by strong cost recovery provisions in airline use agreements at airports and timely toll increases on its bridges and tunnels with minimal impact on traffic levels. This flexibility may, however, come under pressure if World Trade Center rental revenues do not develop as expected, if operating losses on Port Authority Trans-Hudson (PATH) transit network widen significantly or if the authority is required to take on additional operating loss-making assets - although the authority retains significant economic rate-making flexibility, at some point continued toll increases will affect travel demand and the underlying economy. No expected toll increases on its bridges and tunnels after December 2015 until 2020 should allow some build up in pricing power on these facilities again.
Extensive Debt-Funded Capital Plan - Infrastructure Development & Renewal: Midrange
PANYNJ's 2014-2023 capital plan totals approximately \\$27.6 billion. Cost and delay risk are meaningful for a plan of this scale and complexity. These risks would be further compounded if PANYNJ was mandated by either state to take on additional non-core, non-revenue generating assets that could reduce future funding capacity for these capital works. Fitch is of the view that PANYNJ's desired capital investment funding balance of 60% cash, 40% debt (currently approximately 50% cash, 50% debt), which it expects to reach in 2018, is a positive development and should allow PANYNJ to manage a sustainable leverage profile.
Conservative Capital Structure - Debt Structure: Stronger
The authority maintains a nearly 100% fixed-rate, fully amortizing capital structure. It maintains a very healthy liquidity position with over \\$4.4 billion in its consolidated bonds reserve and general fund as at Dec. 31, 2014.
Moderate Leverage, Strong Coverage - Financial Metrics
Leverage is moderate, with 2015 net debt to cash available for debt service (CFADS), excluding grant income, is expected to be around 7.9x, reflecting both cash retained in the consolidated bond reserve fund and the general fund. In Fitch's rating case leverage remains around 8.0x-8.5x range over the 2015-2019 projection period. PANYNJ's debt service coverage ratios (DSCR), calculated excluding non-operating revenue except for passenger facility charges (PFC), are robust, and expected to remain at or above 2.0x in the Fitch rating case until 2019, when additional debt issuance causes it to fall to below 1.80x. The Fitch rating case highlights the importance of rental activity related to World Trade Center to PANYNJ's credit profile over coming years.
Peers: Although Fitch rates several other multi-sector issuers in the U.S. transportation infrastructure sphere, none have a similar level of asset diversity as, and few are of a similar scale to, PANYNJ. Furthermore, none of its closest peers face a similar multijurisdictional ownership or governance structure. The closest peers are Port of Seattle (senior lien rated 'AA'/Stable Outlook) and Massachusetts Port Authority (senior revenue bonds rated 'AA'/Stable Outlook); both have debt secured primarily on airport and port revenue streams. PANYNJ's diverse and high profile asset base is a relative strength; however, significantly higher leverage and risk associated with its large capital plan coupled with its highly politicized operating environment place its ratings one notch below senior lien ratings for both peers.
RATING SENSITIVITIES
Negative - Weaker Operating Margins: Slow revenue growth and/or higher rates of growth in operating expenses could result in negative rating pressure;
Negative - Increased Capital Needs: Significant escalation in capital needs and additional leverage not supported by revenue increases to maintain DSCRs at or above 1.8x-2.0x would reflect a deterioration in PANYNJ's credit profile;
Negative - World Trade Center Rentals: Lower revenue than currently forecast generated from the World Trade Center site as a result of weaker rental demand would increase pressure on PANYNJ's bridge and tunnel assets to meet the revenue shortfall 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 for PANYNJ's ratings;
Positive - None expected in the near to medium term on account of the authority's large capital plan.
TRANSACTION SUMMARY
PANYNJ is reauthorizing its CP obligations program under a new indenture, expected to be utilized on or about Nov. 30 2015. Under the new indenture, expiring Dec. 31 2020, PANYNJ may issue series A, series B or series C CP notes, with outstanding notes under each series authorized up to a maximum of \\$250 million (resulting in a maximum aggregate authorization of \\$750 million). Under its current indenture, expiring Dec. 31, 2015, PANYNJ may issue CP notes in two series with a maximum aggregate authorization of \\$500 million (series A with a maximum authorization of \\$300 million, and series B with a maximum authorization of \\$200 million). The higher aggregate maximum authorization under the new indenture does not change Fitch's leverage expectations for the authority over the medium term. Fitch calculates the authority's coverage of its maximum authorized CP issuance at around 2.3x using cash and liquid instruments, sufficiently strong to support the 'F1+' rating. In addition to the 'F1+' rating assigned to its CP obligations program, Fitch currently maintains an 'AA-' rating with a Stable Outlook on PANYNJ's outstanding consolidated bonds.
Net operating revenue before depreciation and amortization for the first nine months of 2015 was \\$1.454 billion, 21.5% up on the same period in 2014. This strong operating performance has been supported by improved financial performance of all main business areas - tunnels, bridges and tunnels saw net revenue for the nine month period jump to \\$815 million from \\$703.5 million (a 15.8% increase), primarily as a result of the programmatic toll increase levied in December 2014; rail transport saw operating losses reduced from \\$159.9 million in the first nine months of 2014 to \\$146.5 million in the corresponding period this year; net revenue generated from aviation increased to \\$736.6 million from \\$652.8 million in 2014 (an increase of 12.8%), while port commerce net revenue for the nine month period in 2015 of \\$94.1 million was 44.3% up on the \\$65.3 million net revenue generated in the same period in 2014, reflecting the benefit to PANYNJ's port facilities as a result of the prolonged west coast port closures; finally, operating losses generated by the World Trade Center site were down to \\$35.3 million in the nine months to Sept. 30, 2015, down from \\$70.9 million (or a reduction of 50.2%) in the prior year.
On Nov. 12, 2015, New York and New Jersey state officials announced that they had reached agreement with respect to the governance structure and funding commitments that will allow the Gateway Tunnel project, involving the construction of two new rail tunnels under the Hudson River, to progress. The federal government, including the U.S. Department of Transportation and Amtrak, has agreed to meet half the costs of the Hudson River tunnel project. The governors of New York and New Jersey jointly announced in September that, if federal funding for half of the project costs were forthcoming, the two states would take responsibility for developing a funding plan for the other half of project costs, and that the project would be directed by PANYNJ. At this stage it is still not clear what PANYNJ's financial obligations with respect to project funding will be.
For more information on the authority and its recent performance, please refer to Fitch's press release dated Oct. 5, 2015 titled 'Fitch Rates Port Authority of New York & New Jersey's Consolidated Bonds 'AA-'.
SECURITY
Commercial paper obligations are secured by net revenues of the authority deposited in the consolidated bond reserve fund as well as other authority cash legally available to meet such payments as they become due.
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