Fitch Affirms NYC Industrial Development Agency Revs (Terminal One Group Assoc. LP) at 'A-'

Fitch Ratings affirms the 'A-' rating on $295.7 million New York City Industrial Development Agency's special facility revenue bonds, series 2005 (Terminal One Group Association, L.P. Project; TOGA). The Rating Outlook is Stable.

RATING RATIONALE

--Stable International Traffic Profile Within a Competitive Market: Terminal One has a proven operational history since its opening in 1998. Enplanements were approximately 2.1 million in 2011, up 5.2% from 2010 level. Passenger traffic is almost evenly split between the four signatory carriers (Air France, Lufthansa, Korean Airlines and JAL) and 14 contract carriers. New York City has a strong market for air traffic and JFK Airport ranks as the leading international gateway airport in the U.S. Concentration risk is more centered for ongoing contract carrier service given the existence of other international terminals within JFK and other New York area airports.

--Well Structured Framework for Cost Recovery: The TOGA partnership has demonstrated a stable framework for debt repayment. The legal structure provides an unconditional and irrevocable obligation by TOGA to make lease payments equal to debt service without set-off or abatement. The repayment obligation is joint-and-several among all four TOGA partners with full step-up provisions in case of delinquencies or defaults.

--Conservative Debt Structure: The project bonds and underlying lease payments are in fixed rate mode. The bonds are solely secured by lease payments without recourse to other terminal-related revenues or from Port Authority of NY/NJ credit. Additional legal security includes both a 25% operating and maintenance reserve and a 25% annual debt service rolling coverage account. These accounts are supplemented by a fully cash-funded debt service reserve fund held by trustee.

--Stable Cost Structure and Financial Profile: Additional revenues from contract carriers, concessionaires and interest earnings subsidize costs to signatory carriers. No major capital expenditures necessary.

WHAT COULD TRIGGER A RATING ACTION:
--Significant changes in terminal traffic caused by underlying demand or competition at other JFK terminals;

--Credit or performance issues with the signatory carriers;

--Shift in the terminal project cost structure or weaker performance in non-aeronautical revenues, resulting in less competitive cost per enplanement (CPE) and deterioration of financial flexibility;

--Material changes in the terminal's future capital and/or debt needs.

SECURITY:

Facility rental payments made by the lessee, TOGA, secure the series 2005 special facility revenue bonds.

CREDIT UPDATE:

Terminal One opened in the fall of 1998 and serves as an essential facility for a number of the world's leading international carriers. The pattern of traffic levels has been largely positive through most years in operation. In 2011, aggregate enplanements were 2.08 million, the second highest recorded traffic level for this terminal since its opening. This traffic base represents a 5.2% increase in enplanements over the prior year. Fitch notes that the four signatory carriers alone have demonstrated a solid level of annual traffic for Terminal One, collectively averaging just over 1 million enplanements annually over the past five years.

Air France continues to remain the largest carrier with about 22% of total traffic activity demonstrating the diversity of carrier utilization. TOGA currently contracts with 14 additional carriers through multi-year leases and these carriers capture approximately 50% of the terminal's total passengers. Many of these airlines have renewed their respective use agreements recognizing the cost advantage, although most renewals are for three years or less. Even though Japan Airlines (JAL) filed for bankruptcy in early 2010 and has since exited that process, TOGA's management has indicated that JAL's actions did not impact the carrier's operations at the terminal facility and that JAL has been current on all financial obligations.

Overall, facility operations remain sound with stable activity and ongoing capital investments. Notable improvements made in recent years include new A380 widebody aircrafts at up to four of the terminal's 10 active gates. Future capital improvements are modest and are expected to be funded without additional borrowings. One larger project under consideration is a new in-line baggage system, the costs of which much of the costs are likely to be covered through federal funding sources.

Competition for foreign-flag carrier exists within JFK, particularly at Terminal Four. That terminal is the largest JFK facility for international traffic, serving over 30 carriers and over four million enplanements. However, Fitch believes that the New York market is likely to preserve its dominant position for international travel and therefore both terminals should hold onto most of its traffic base.

Of the $100 million in total operating revenue collections for fiscal 2011, approximately 35% is derived from the signatory carriers and supplemented by a 43% collection level from contract carriers. Concessions and other revenues sources typically provide for 15% to 20% of operating revenues. While revenues derived by contract carriers and concession tenants are not pledged to bondholders, Fitch believes that these revenues are important to the credit as it provides a partial subsidy of costs to the obligated signatory carriers. In recent years, concession based revenues have grown as modifications and new outlets enhanced passenger spending at the terminal.

From a cost perspective, Terminal One has produced net cost profile that has been lower than originally projected and has proven to be attractive to retain contract carriers. Figures for 2011 indicate terminal costs at under $19 per enplanement. When including net costs for ramp operations, overall costs are about $31 per enplanement. These figures take into account the one-time use of excess bonds funds totaling $3.6 million which had the effect of reducing signatory carrier costs. Fitch expects signatory carrier costs, including ramp operations to be closer to the $38-$40 level based on the offsets derived from contract carrier service and non-aeronautical revenues. Comparatively, Terminal Four cost levels are not materially different at about $40 per enplanement.

The financial position of the TOGA operations is sound, noted by moderate leverage (7.3 times [x] net debt to casflow available for debt service) and a healthy fund balance including a cash funded debt service reserve maintained at maximum annual debt service, and a separate unencumbered cash reserve balance of $19.7 million. TOGA is required to keep fund balances equal to 25% of annual operating costs and 25% of annual debt service requirements. At these levels, Fitch believes that TOGA has adequate liquidity capacity to handle adverse events such as a signatory carrier loss or an unanticipated sharp decline in demand.

TOGA is a New York limited partnership established to lease, finance, construct, maintain, and operate the new Terminal One facility. TOGA's general partner is Terminal One Management, Inc. (TOMI), and its limited partners are the signatory airlines: Air France, Japan Air Lines, Korean Air, and Lufthansa. TOMI shareholders consist of the four signatory carriers and each is obligated to pay all Terminal One costs, including debt service; this obligation is joint and several and provides a pro rata step-up provision.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--'Rating Criteria for Airports' (Nov. 28, 2011).

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970

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