NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to $2.26 billion in special facilities bonds, series 2016A (tax exempt AMT), and $150 million special facilities bonds, series 2016B (taxable), being issued by New York Transportation Development Corporation on behalf of LaGuardia Gateway Partners, LLC (LGP). The Rating Outlook is Stable.
Fitch has withdrawn its expected rating on LGP's special facilities bonds, series 2016C, because the bonds were not issued.
The rating reflects the favorable demand characteristics and critical services provided by the Port Authority of New York and New Jersey's LaGuardia Airport's Terminal B facility. A strong air trade service area, positive historical traffic utilization and constrained airport land capacity support the view of resilient commercial passenger usage, although competition from other terminals within LaGuardia and nearby airports remains. Forecasts indicate rising but relatively competitive airline costs although most will be recoverable from airline carriers. The economic strength of the Terminal B project supports higher than average initial leverage for the investment grade level at 13.6x, while anticipated debt service coverage ratios (DSCR) in the 1.4x-1.5x range are consistent with the 'BBB' rating.
Maintaining a sound level of DSCR and manageable leverage metrics over the lease term will be dependent on an improvement in terminal concession revenues; however, this assumption is reasonable given the expectation of facility improvements to promote retail spending from passengers. The complexity of the terminal redevelopment project from a construction execution and cost perspective is an inherent risk, although Fitch believes this to be adequately mitigated through both the experience of the design-build joint venture and the security package. The project compares favorably to its closest peers which are other single terminal facilities in the New York market (JFK IAT - 'BBB'/Outlook Stable; and TOGA - 'A-'/Outlook Stable). New Terminal B will have a similar operating scale to JFK IAT (double that of TOGA), while TOGA benefits from contractually-sound joint-and-several payment obligations from major carriers.
KEY RATING DRIVERS
Experienced Contactors; Adequate Security: The LGP team benefits from two experienced contractors (Skanska USA Civil Northeast Inc./Skanska USA Building Inc., and Walsh Construction Company II LLC), with both global and local experience directly relevant to the project, whose credit quality does not constrain the project rating. The security package features a fixed-price, lump sum, date-certain contract with parent guarantees, adequate liquid security in the form of a letter of credit initially sized at 6.5% of the contract price (later stepping down to 3.5%) and built-in contingencies estimated to be 7.5%. LGP's design and construction plan is fully developed, and includes detailed cost estimates and an adequate liquidated damages provision with a maximum of 8%. These elements provide sufficient protection to weather construction cash-flow stress scenarios due to delays or a contractor replacement. Completion Risk: Midrange
Stable Traffic Profile: The closest of the major New York airports to Manhattan, LaGuardia Airport has a proven, stable operating history, and serves roughly one third of domestic passenger traffic in the region. LaGuardia served 28.4 million passengers in 2015, up 5.5% from a year prior and growing 3.5% on a compound annual average basis over the last five years. The existing Terminal B handled roughly 50% of this traffic, with a diverse mix of carriers. Competition risk is mitigated by the proximity of LaGuardia to the city center and the capacity constrained nature of the New York air travel market as well as high demand for slots at the airport. Revenue Risk - Volume: Stronger
Uncertain Cost Recovery Framework: The existing airline use agreements have been agreed to be extended through the construction period but some degree of uncertainty exists regarding cost recovery terms following project completion. Still, airline payments are expected to provide considerable stability, accounting for 80%-85% of pledged revenues to the extent a commercial compensatory or resolution tariff based approach is implemented with the carriers. In Fitch's rating case, project-based airline cost per enplanement (CPE; including airline specific costs such as clubroom rentals and tenant finishes) is estimated to rise over $30 post-completion but will still be competitive to those estimated at other New York airports. Revenue Risk - Price: Midrange
Detailed O&M and Lifecycle Plan: Fitch believes the lease agreement and the implementation plan from LGP to be comprehensive in nature to manage operations and ongoing renewal works. Further, handback provisions are well structured including a five-year look forward funding provision at 115% of the handback reserve requirement. Infrastructure Development & Renewal Risk - Stronger
Strong Covenants Offset Escalating Structure: The proposed financing structure has conservative features including a fixed interest rate for all borrowing, a sound rate covenant test at 1.25x, equity distribution lockup at 1.20x, adequate operating reserve balances, and a cash-funded, six-month debt service reserve fund to be built up over the construction period. Some structural risks remain as debt service payments are scheduled to rise over the lease term and therefore require ongoing revenue growth. Debt Structure - Stronger
Elevated Initial Leverage: Initial leverage is elevated at approximately 13.6x on a net debt to cash flow available to debt service (CFADS) basis in the first fully operational year but is expected to evolve downward through growth in airline and non-airline revenues. Under all Fitch reviewed scenarios, the debt burden is offset by a stable DSCR range in both the Fitch's Base Case (1.48x-1.53x) and Rating Case (1.38x-1.47x). Project construction liquidity is adequate and will be provided through an initial working capital reserve and various capital and operating contingencies.
Peer Group: The nearest comparable peers to LGP are JFK's Terminal One Group Association, LP (TOGA; rated 'A-'/Outlook Stable) and JFK's International Air Terminal (JFK IAT or Terminal 4, rated 'BBB'/Outlook Positive), which operate under similarly unique business models as LGP, albeit without completion risk. Furthermore, LGP's peers compete for New York international travel while LGP is focused on nearly only domestic travel. LGP is more levered than its peers but less single-carrier concentrated relative to JFK IAT. LGP and JFK IAT share similar, large-scale operations, which are double those of TOGA, while TOGA's rating reflects a contractually-sound payment obligation from four major carriers on a joint-and-several basis.
RATING SENSITIVITIES
Negative: Substantial cost overruns, delays during construction or poor operational performance could negatively affect the rating.
Negative: Cost recovery methodology terms that generate reduced airline cost recovery contributions following project completion could negatively affect the rating.
Negative/Positive: Changes in traffic volumes, non-aeronautical spending levels that deviate significantly from current forecasts could either positively or negatively change the rating, depending on the nature of the deviation.
Positive: Completion of essential elements of the overall project, removing completion risk and allowing for realization of associated revenue streams, may warrant positive rating action.
TRANSACTION SUMMARY
The bonds priced on May 17, 2016 and were issued as $2.260 billion of AMT tax-exempt bonds, series A and $150 million of municipal taxable bonds, series B. The proposed series C, which would have been a private placement with a delayed draw feature of up to two years, was not included in the final financing structure. Financial close is scheduled for June 1, 2016. Final pricing for the bonds provided all-in true interest costs of 4.2% for the series A bonds, and 3.6% for the series B bonds. The bonds will fund the LaGuardia Terminal B Replacement Project, consisting of a new central terminal to be constructed in phases over a 74 month period. The actual borrowing costs were lower than anticipated based on earlier assumptions reviewed by Fitch, resulting in slightly higher debt service coverage ratios in Fitch's base and rating case scenarios.
The sponsor-provided financial model contemplates DSCRs no less than 1.48x and that average 1.50x. Nominal CPE in the sponsor case is approximately $27-$28 in 2023, including airline specific costs such as clubroom rentals and tenant finishes. Fitch viewed the assumptions behind this scenario (0.9% average enplanement growth, 2.6% aero revenue growth post completion, 3.0% non-aero revenue growth, and 2.8% operating cost growth) as reasonable, and adopted this scenario as its base case.
Fitch's rating case considered combined downside scenarios including a 5% reduced traffic growth and concession revenues, a 10% increase in O&M and lifecycle costs, and a 1% decrease to inflation. The rating case results in a minimum DSCR of 1.38x and an average of 1.42x, with CPE slightly higher at approximately $28-$29 in 2023. The sponsor provided model indicates the financial structure can withstand several downside scenarios, including 0% enplanement growth from 2016 levels; a one year delay in construction applied at each DBO date; and a scenario where airline rates are charged by tariff such that rates are set to achieve the 1.25x rate covenant. Fitch notes that in both its base and rating cases, aeronautical revenues alone are sufficient to cover debt service obligations on a sum sufficient basis in most years.
For a complete review of Fitch's analysis of the LaGuardia project, please refer to 'Fitch Expects to Rate LaGuardia Special Facility Revs 'BBB'; Outlook Stable' dated April 22, 2016, and Fitch's presale report for LaGuardia issued on May 2, 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877676
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005232
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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