Fitch Ratings has assigned a ‘AA-‘ rating to the Port Authority of New York and New Jersey’s (PANYNJ) proposed issuance of approximately $390 million of series 240th and 241st consolidated revenue bonds. The Rating Outlook is Stable.
RATING RATIONALE
The ratings reflect 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 are approaching or 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 ratings on both liens are 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; therefore, PANYNJ is somewhat limited in its economic rate-raising flexibility. However, 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. Projects primarily focus on rehabilitating or reimagining existing assets and accommodations for future growth, 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 – Debt Structure 1 – Stronger
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 2022 showed a strong recovery over the pandemic-related challenges of 2020 and 2021, with net revenues 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 financial improvement in 2022 has enabled the port to restore its liquidity position, 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. Total leverage for the Port of Seattle’s is similar to PANYNJ in the 7x range under the rating case and aligned at the ‘AA-‘ rating level, 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, together with leverage in the rating case stabilizing below 6x.
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.
Source: Fitch Ratings