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Fitch has withdrawn its expected rating on LGP's special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
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005232
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystEmma
GriffithDirector+1-212-908-9124Fitch Ratings, Inc.33 Whitehall
StreetNew York, NY 10004orSecondary AnalystCasey CathcartAssociate
Director+1-312-368-3214orCommittee ChairpersonSaavan GatfieldSenior
Director+1-212-908-0542orMedia RelationsElizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com