Fitch Ratings has assigned a ‘AA-‘ rating to the Port Authority of New York and New Jersey’s (PANYNJ) proposed issuance of approximately $1.1 billion of series 242nd and 243rd consolidated revenue bonds. The Rating Outlook is Stable.
RATING RATIONALE
The rating reflects the PANYNJ’s solid credit profile, including a sound recovery from the pandemic across the key business segments of bridges and tunnels, aviation and port facilities. All key business lines have achieved a full recovery in traffic volumes and are on pace to maintain revenue growth over the medium term. The ratings also reflect the authority’s strong oversight of operating and capital costs during the pandemic and post-pandemic periods, when traffic volumes and operating revenues were adversely impacted.
The rating is anchored by PANYNJ’s mature, diverse and monopolistic transportation infrastructure asset base, which provides critical service to the strong New York City metro area, supported further by a conservative debt structure.
PANYNJ has further demonstrated strong execution on its major capital needs, especially for the airports, which are expected to drive revenue growth under the port’s cost recovery agreements. The port has maintained financial flexibility while managing and dedicating resources to its very large capital plan, including restoring liquidity to levels that allow for a balanced mix of pay-go funding together with future debt borrowings for capital needs.
Under Fitch’s rating case senior net leverage averages 5.9x (7.0x total) and senior debt service coverage ratio (DSCR) averages 2.0x (1.8x total). The senior and subordinate financial metrics are consistent with the ‘AA’ and ‘A’ categories, respectively, for transportation enterprises.
KEY RATING DRIVERS
Revenue Risk – Volume – High Stronger
Resilient Revenue Base
PANYNJ’s portfolio of monopolistic, expansive and diverse transportation and real estate assets includes the four metro New York airports, interstate road, rail and ferry Hudson River crossings, and seaport terminals. The region’s diverse and populous economy as well as its status as a global center for commerce supports resilient demand and pricing power. Economic pricing flexibility may fall if World Trade Center or Port Authority Trans-Hudson transit assets underperform or if PANYNJ takes on additional loss-making assets.
Revenue Risk – Price – Stronger
Proven Rate-Setting Flexibility
PANYNJ benefits from strong airport cost recovery in airline use agreements and proactive toll increases on its bridges and tunnels with minimal impact on traffic levels. Fitch notes that adjustments to user rates and tolls could be influential to regional economic activity and therefore PANYNJ is somewhat limited as compared to its apparent economic flexibility. Still, the authority benefits from numerous commercial agreements that provide for strong cashflows and certain key tolls and fares are automatically adjusted to inflationary indices.
Infrastructure Dev. & Renewal – Midrange
Extensive & Growing Capital Plan
PANYNJ’s capital plan through 2026 totals approximately $37 billion to support key airport and rail projects as well as bridges and tunnel works and a replacement bus terminal, amongst others. Projects primarily focus on rehabilitating or reimagining existing assets rather than on expansion, with some projects having limited financial recovery. The port significantly scaled back capital spending during 2020 and 2021 due to the pandemic.
Moving forward, there remain long-term risks to the capital program, particularly as the exact budgets for the rehabilitation of major assets are not yet finalized, and may be subject to increase. These risk factors are mitigated by the port’s proven history of finding collaborative funding models, including the use of innovative project delivery models such as public private partnerships, support from key city and state government stakeholders, and a well-balanced funding mix for the port’s own capital plan contributions of debt, pay-go capital and grant funding.
Debt Structure – 1 – Stronger
Conservative Capital Structure
The senior lien consolidated bonds benefit from their nearly 100% fixed-rate, fully amortizing capital structure with a robust covenant package and strong dedicated liquidity.
Financial Profile
PANYNJ operating results for 1H23 build on the solid recovery in 2022 from the pandemic-related challenges of 2020 and 2021. In 2022 and 1H23, net revenues are exceeding 2019 levels in the key business segments of aviation, toll bridges and tunnels, and ports. Financial performance has been bolstered by the port’s strong management of capital and operating costs since the onset of the pandemic, as well as the port’s strong execution of major capital projects.
The port’s liquidity position remains robust, with surplus funds rebuilding the general reserve fund and consolidated bond reserve fund, and allowing for increasing allocations to pay-go capital funding moving forward. Leverage under Fitch’s rating case is expected to average 5.9x on the senior lien through 2027 (7.0x total), with debt service coverage improving to the 2.0x average level (1.8x total), even when taking into account anticipated borrowings to support the capital program.
PEER GROUP
PANYNJ’s closest peers are Port of Seattle (AA/AA-/Stable) and Massachusetts Port Authority (Massport; AA/Stable), both of which are reliant on airport and port revenue streams. Port of Seattle’s leverage is similar to PANYNJ in the 7x range under the rating case, while Massport leverage declines to below 4x over the medium term, which is reflected in the one-notch higher rating. PANYNJ’s diverse and high-profile asset base is a significant strength; however, PANYNJ still faces longer-term risks around its capital plan, with certain high-profile projects not yet finalized, which could lead to cost increases and pressure financial metrics relative to peers.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Activity reductions and revenue losses across the authority’s transportation assets resulting in delayed operational recovery and causing Fitch calculated DSCRs to remain below 1.8x at the senior level and 1.7x at the subordinate level on a sustained basis, or net leverage on total debt to remain above 10x for a prolonged period.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Upward rating movement would be conditioned on significant clarity around the long-term capital plan, which is not likely in the current forecast period.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
TRANSACTION SUMMARY
The Port Authority of New York and New Jersey is planning to issue two series of consolidated bonds, series 242nd and series 243rd for a total par amount of approximately $1.08 billion. Bond proceeds will be allocated with approximately $250 million for new money purposes and approximately $830 million towards the refunding of prior issuances of PANYNJ’s consolidated bonds.
CREDIT UPDATE
Financial operating results for PANYNJ for the six-months ending June 30, 2023 are trending slightly better than budgeted. Total operating revenues ended at $3.16 billion for the period, up by over $300 million from 2022 levels and $49 million better than budget. Operating expenses were slightly better than budgeted expectations, leading to net revenues available for debt service of $1.83 billion, approximately $89 million better than budget. Liquidity remains robust with over $4.8 billion in unrestricted liquidity.
Aviation and vehicle traffic levels for the six-months ending June 30, 2023 are tracking at 102% and 101% of 2019 levels, respectively, indicative of steady economic trends around the New York City region. Aviation volumes continue to improve, reflecting strong growth in international travel patterns and solid domestic travel demand. Aviation revenue growth in 2023 is driven by new fees and rentals related to new terminals at Newark and JFK, and by an increase in passenger activity. Toll bridge and tunnel revenue for 1H23 is up 8% over 1H22, aided by the $1.00 toll increase that was implemented in January 2023.
Cargo TEU volumes at port facilities are tracking at 102% of 2019 levels, but are down significantly from 2022 peak levels as trade volumes have normalized. PATH ridership levels in 1H23 are improving over 2022 levels, but remain at around 60% of 2019 levels.
For the first half of 2023, capital spending was around $821 million. The port has not updated its long-term capital planning assumptions since Fitch’s previous review.
FINANCIAL ANALYSIS
Given the port’s stable year-to-date trends through June 30, 2023, Fitch has not made material updates to its medium-term financial analysis relative to the May 2023 review.
Fitch’s base case reflects the port’s budgeted growth for 2023, followed by low-single-digit increases to bridge and tunnel, aviation, and port revenues through 2027. Aviation passengers are expected to exceed 2019 levels in 2023, while vehicle traffic remains effectively equal to 2019 levels. PATH passenger growth remains tepid due to the shift in remote work, with a prolonged recovery.
Port volumes are expected to drop slightly from peak 2022 levels, but exceed 2019 levels in each year through 2027. Operating expenses are expected to remain well-managed at a CAGR of 3.6% from 2022-2027. Under this scenario, senior lien DSCR averages 2.2x (2.0x total), with net leverage of 5.5x for the senior lien and 6.6x for total debt.
Fitch rating case reflects a slower recovery in traffic volumes, reflecting a more modest economic recovery, with aviation traffic reaching 2019 levels in 2024. Vehicle traffic on the toll bridge and tunnels remains at 99% of 2019 levels, and PATH passenger growth reaches only 82% of 2019 levels by 2027.
The rating case reflects the port’s strong cost recovery mechanisms and aligns per-passenger revenues to Fitch base case levels. Operating costs are grown by 50bps above the Fitch base case, for a CAGR of 4.1% through 2027. Financial flexibility remains solid, with DSCR averaging 2.0x senior lien (1.8x total) and leverage through 2027 averaging 5.9x on the senior lien (7.0x total).
Date of Relevant Committee
30 May 2023
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Source: Fitch Ratings