Fitch Ratings assigns an ''AA-'' underlying rating to the Port Authority of New York and New Jersey''s (the authority) $300 million of consolidated bonds, series 161. The bonds are expected to price competitively on or around Oct. 28, 2009 and have a final maturity of 2039. Consolidated bonds and notes are secured by net revenues of the authority and a pledge of the general reserve and consolidated bond reserve funds. Bond proceeds will be used to support capital projects of the authority.
Fitch has also affirmed the underlying ratings on the following authority bonds:
--$12.05 billion consolidated bonds at ''AA-'';
--$308.6 million versatile structure obligations series 1R, 3, 4 and 6 at ''A+''.
The Rating Outlook on all outstanding debt is Stable.
The authority''s ratings reflect the demand for New York/New Jersey-based travel, supported by the region''s diverse economy and status as a global center of commerce; the authority''s expansive, diverse portfolio of transportation and commerce-related assets; institutionalized practices and fiscal conservatism; consistently healthy financial performance and debt service coverage, bolstered by the cost recovery nature of the airport use agreements, cost containment strategies, and timely toll increases; significant balance sheet liquidity, and the authority''s proven ability to manage operations and an expansive capital plan simultaneously.
The primary credit concern remains the potential for increased leverage and reduced liquidity as a result of the authority''s very large financial commitments for the improvement and expansion of its existing assets, along with developments at the World Trade Center (WTC) site and the Access to the Region''s Core Project (ARC). The latter two commitments are currently budgeted at $9.5 billion and $3 billion, respectively, and are part of the authority''s overall $29.5 billion 2007-2016 capital plan. The authority currently estimates that approximately 40% of the total capital plan will be debt funded and remaining funding sources will be provided by direct investment of the authority''s funds; however, the current capital plan is under review for possible deferment of certain individual projects given current economic conditions and resultant effects on business lines. Based on the financial impact of the recession on revenues, the authority may reduce the total capital plan to $26 billion. It is Fitch''s expectation that the authority will continue to adjust its capital and to a lesser degree, operating plans, to maintain debt service coverage at or above 2.0 times (x). Should depressed revenue trends continue, financial metrics and debt service coverage could be strained.
The authority''s capital plan and budget already assumes a reasonable increase in debt-supported capital investment, and toll and fare increases were implemented on March 2, 2008, yielding approximately $312 million in additional revenue per year.
An ongoing and recently elevated risk is the authority''s involvement with redevelopment of the WTC site. Year-to-date, the authority has experienced substantial challenges in connection with its rebuilding efforts, resulting in large increases in liquidated damages (LDs). Although the authority recently met its obligations in turning over sites for Tower 2, 3, and 4, it incurred $140 million in LDs due to Silverstein Properties Inc. (SPI) - significantly higher than the $29 million included in the 2009 budget. Subsequently, SPI filed an arbitration notice against the Port Authority citing negligent misrepresentation and or/fraud and is seeking monetary damages of approximately $2.75 billion. Should the outcome of the arbitration rule in favor of SPI, the authority''s financial margins could be pressured given its prominent role in regional economic development and execution of its $29.5 billion capital plan. Fitch will continue to monitor the ongoing WTC rebuilding efforts and expects the authority to adjust its capital plan should it encounter increased construction costs, delays, and/or monetary damages. Yet, Fitch notes the authority''s considerable reserve balances, representing approximately 22% of senior bonds and notes outstanding. The arbitration is expected within the close of 2009.
In light of the current U.S. and global economic downturn and the expected tepid economic recovery, Fitch believes it may be necessary for the authority to prioritize core capital projects, increase revenue streams, and defer non-essential capital projects in order to maintain healthy financial margins. Year to date, revenues generated from passengers at the authority''s airports is up approximately 3.5% when compared through June 2008, interstate tolls and rail revenue is up 15%, and port revenues are essentially flat. Operating expenses are near the authority''s projection, growing by only 3.5% when compared through June 30, 2008. However, overall activity levels are down and below budget for the current year. Total passenger activity at the authority''s airports is down 5% below plan and container cargo activity has dipped 27% below plan. Vehicular traffic at the tunnels and bridges is virtually on target with the 2009 budget assumptions. In order to counteract these negative trends and preserve net income, hiring freezes and attrition practices are in effect, reductions in certain non-essential contracted services have been executed, a voluntary severance program was implemented, and a portion of capital spending for 2009 has been delayed. Other revenue generating measures include mid-year airport parking rate adjustments at EWR, JFK, and LGA.
The authority showed healthy operating performance in 2008, supporting solid coverage of debt service carrying charges, reinvestment in facilities, and accumulation of reserves during the year. Net revenues (excluding WTC Sept. 11 revenues) of approximately $1.94 billion provided 3.46x debt service coverage. Net revenues in 2009 of approximately of $1.9 billion, including insurance proceeds and other non-operating income, are expected to provide debt service coverage in excess of 2.0x. In 2008, despite incurred liquidated damages expenses, net operating income increased by approximately $220 million, capturing higher tolls and fare revenues, increased rental revenues from major aviation and port facilities, and higher aviation fees from cost recovery agreements with airlines operating at LGA, JFK, and EWR. The authority''s total reserve fund balances, including the general reserve and consolidated bond reserve fund increased to $2.39 billion during 2008, representing 22% of the authority''s senior bonds and notes outstanding. The authority expects its solvency position to remain strong throughout 2009, with reserves projected to reach $2.5 billion by the end of its fiscal year.
The application of the following criteria was used to derive the rating of the above referenced bonds:
--''Rating Criteria for Infrastructure and Project Finance'', dated Sept. 29, 2009;
--''Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds'' dated March 12, 2007.
Both are available on the Fitch Ratings'' web site at ''www.fitchratings.com''.
Additional information is available at ''www.fitchratings.com''.
Fitch Ratings, New York
Vanessa E. Roy, 212-908-0508
Mike McDermott, 212-908-0605
Cindy Stoller, 212-908-0526