OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to approximately $169 million of Terminal One Group Association LP (TOGA) special facility revenue refunding bonds, series 2015, to be issued by the New York Transportation Development Corporation (NYTDC). At the same time, Fitch affirms the existing 'A-' rating on the outstanding $238.5 million New York City Industrial Development Agency (IDA) special facility revenue bonds, series 2005, issued on behalf of the TOGA project. The proposed series 2015 bonds are expected to fully refund all of TOGA's outstanding debt. The Rating Outlook is Stable.

The rating reflects a long-term, demonstrated commitment by the four signatory carriers to the project, which provides the international terminal facility with significant economic value within a highly desirable market. These favorable attributes coupled with strong structural features under the project leases and loan agreement adequately mitigate the underlying counterparty risks from TOGA's four foreign-flag signatory carriers (Air France, Lufthansa, Korean Airlines, and Japan Airlines) whose ongoing payments are limited to unsecured corporate obligations.

All of TOGA's costs, including the terminal project debt, are secured under a joint-and-several arrangement. Therefore, loan repayment risk occurs only in the event all four signatories concurrently fail to meet their respective obligations to TOGA. The presence of four signatory carriers under the TOGA organizational structure, each with its own strong global presence and market position in air transportation, provides adequate protection in a scenario where any single carrier would no longer remain in operation or desire to maintain flights at JFK airport. On the economic side, facility leverage at Terminal One is moderate at 4.2x while the signatory carriers' net costs are effectively near zero at the current level of terminal passenger levels.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange
Expanding International Service; Moderate Competition: Terminal One at JFK International Airport (JFK) has had a proven operational history since opening in 1998. Enplanements were 3.1 million in 2014, up an impressive 14.4% from 2013, and are expected to end 2015 up an additional 7.5% to 3.4 million. Approximately 34% of enplaned passenger traffic is derived from the project's four signatory airlines (Air France, Lufthansa, Korean Airlines, and Japan Airlines), which are also equity-holders in TOGA, while the remaining 66% is derived from 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 as well as other NY area airports.

Revenue Risk - Price: Stronger
Solid Cost Recovery Framework: TOGA has demonstrated a stable framework for debt repayment. The legal structure provides an unconditional and irrevocable obligation by TOGA to make monthly 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 $32.68, the signatory carriers are projected to benefit from near zero net costs starting in 2016.

Infrastructure Development & Renewal: Stronger
Satisfactory Structure; No Material Works: Since 1999, TOGA has made a significant investment in capital improvements, 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 $51.4 million central baggage inspection system. TOGA's contribution of $6.9 million for the baggage system can be covered from rates to carriers, while the remaining costs were funded through grant reimbursements. No further major capital expenditures are necessary in the near term; however, TOGA is preliminarily considering an expansion on the property adjacent to Terminal 2. Costs and financing plans associated with the new project are still under discussion.

Debt Structure: Midrange
Adequate Debt Covenants, Security: The project bonds are fixed rate and are solely secured by monthly loan payments without recourse to other terminal-related revenues or to the Port Authority of New York and New Jersey itself. Additional legal security is available through a 25% annual debt service rolling coverage account. While a debt service reserve would afford greater liquidity protection, the lack of a reserve is not viewed as a weaker credit attribute.

Financial Metrics
Stable Cost Structure and Financial Profile: Additional revenue from contract carriers, concessionaires and interest earnings substantially subsidizes costs to signatory carriers. Signatory airline costs, including those for ramp operations, have been declining due to the growth in other revenue sources. Both historical and forecast debt service coverage ratios (DSCRs) are consistently above the 1.25x minimum level, taking into consideration cash and coverage account balances.

Peer Group: The nearest comparable peer to TOGA is JFK's International Air Terminal (JFK IAT or Terminal 4), which operates under a similarly unique business model as TOGA, and competes for New York international travel with other terminals at JFK and Newark Airport. TOGA is currently less levered and less single-carrier concentrated relative to IAT. However, TOGA has a smaller operating scale with a 2015 overall enplanement base that is less than half that of IAT.

RATING SENSITIVITIES
Negative: Global Air Market: A material contraction or disruption in the global air market that simultaneously affects the four signatory carriers as well as JFK Airport's economic attractiveness could lead to rating action.

Positive: The rating is currently constrained to the 'A-' rating level.

TRANSACTION SUMMARY

TOGA is refinancing its series 2005 bonds for economic savings. The proposed refunding bonds will feature a shorter amortization, but will not include a debt service reserve fund. To support the transaction, Fitch believes that the cash flows from the signatory airlines under the lease agreement with TOGA are only at risk if all carriers default on their payments, as a result of bankruptcy or insolvency events. While an individual airline could reject the lease with TOGA, this is first mitigated by the joint-and-several nature of the signatory obligations and the timely reallocation of amounts due to surviving signatories. The proven economics of the project afford each of the signatories access to JFK at a cost well below the cost per enplanement that would be available in another terminal at JFK.

Each of the carriers is a major worldwide operator with significant incentive to have access to one of the world's most important gateway airports. In a bankruptcy proceeding of a signatory carrier, Fitch believes it is unlikely that the facility lease with TOGA would be rejected on economic grounds and also unlikely from a practical perspective if an airline desires to continue to use JFK. This scenario was recently tested when Japan Airlines entered into bankruptcy in 2010 and continued to perform on all payment obligations due to TOGA, including those associated with the project debt. The analysis of other cash flows that are derived by TOGA from non-contract carriers and the fundamentals of this terminal also drive the rating conclusion.

Fitch's base case assumes a 1% level of average traffic growth through 2020 coupled with both revenue and expenses growing at 2.5%. Under this scenario, average CPE for all carriers is expected to remain in the current $30-$32 range; however, the signatory carriers are expected to not have a positive net cost. Leverage is expected to quickly evolve downward through the forecast period from the current 4x range.

Fitch's rating case assumes a 5% traffic loss for the signatory carriers and a separate 10% loss for the contract carriers in 2016, followed by a soft annual total recovery of 1% through 2020. The results indicate that CPE levels will peak at slightly over $35 while the signatory carriers still have minimal net costs. Given the short duration of the debt amortization, terminal leverage is not expected to be materially different than the Fitch base case.

For further information related to TOGA's recent performance, please refer to Fitch's Nov. 6, 2015 press release, 'Fitch Affirms NYC Industrial Development Agency Revs (Terminal One Group Assoc. LP) at 'A-''.

SECURITY

The proposed refunding bonds are secured through the NYTDC's loan agreement and the signatory carrier use agreements, which obligate TOGA to pay loan payments to the NYTDC in an amount equal to the principal, redemption price, if any, and interest on the bonds. Pursuant to the use agreements, the signatory carriers are obligated to make payments to TOGA that, in aggregate, will be sufficient to pay TOGA's total fixed costs and total net variable costs for each fiscal year. Each signatory carrier unconditionally and irrevocably agrees to pay its pro rata share of TOGA's payment obligation under the NYTDC loan agreement. Furthermore, the use agreement stipulates that should a signatory carrier default in regard to payments obligated by its use agreement, the non-defaulting signatory carriers will be required to cover such amounts in full and in a timely manner on a pro rata basis.

The structure does pose risks in the event of insolvency and reorganization or liquidation of all four member airlines. Other terminal-generated revenue such as contract carrier fees or concession receipts are not pledged to repayment of the bonds. Nevertheless, there are robust protections that make it unlikely, to a level consistent with the rating of the debt, that the airlines would collectively default on the leases and reject them in bankruptcy.

Furthermore, the site lease agreement with the Port Authority does not terminate upon the insolvency of any of the signatories, but looks only to TOGA itself and the general partner. Therefore, the legal protections preserving TOGA's agreement with the Port Authority are robust.