Fitch Ratings has downgraded the rating to 'BBB' from 'BBB+' on the JFK International Air Terminal's (IAT or Terminal 4) debt on approximately $1.3 billion outstanding parity special project bonds series 6 and series 8 issued by the Port Authority of New York and New Jersey.
The bonds have been removed from Rating Watch Negative and assigned a Negative Rating Outlook.
The downgrade to 'BBB' reflects an elevated risk profile facing the project as the COVID-19 pandemic resulted in significant reductions in both international and domestic terminal operations and enplanement volumes. Project revenues and coverage metrics both face exposures to activity levels and will be substantially lower than previously forecasted in the near term. The weak traffic volumes also result in a larger revenue dependency on Delta Air Lines (IDR: BB+/Negative) which represents over 70% of passengers. Under Fitch's rating case, coverage levels in fiscal 2020 could narrow to below 1.5x, a metric weaker when compared to historical performance and expectations for a meaningful recovery remains uncertain and likely to extend for several years.
The Negative Outlook reflects the uncertainty of operating performance due to the outbreak of the coronavirus and related worldwide containment measures, with credit metrics linked closely to the timing and magnitude of recovery.
The outbreak of coronavirus and related government containment measures worldwide create an uncertain global environment for the airport sector. The JFK IAT performance data through most recently available issuer data indicates some impairment in financial performance. Material changes in revenue and cost profile are occurring across the airport sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation. Fitch's ratings are forward-looking in nature, and Fitch will monitor developments in the sector as a result of the virus outbreak as it relates to severity and duration, and incorporate revised base and rating case qualitative and quantitative inputs based on expectations for future performance and assessment of key risks.
Key Rating Drivers
Strong Market despite Competition - Revenue Risk (Volume): Midrange
The terminal served over 21 million passengers in 2019 and benefits from an exceptionally strong catchment area for both international and domestic passenger traffic in the NYC region. The region remains one of the most affluent and historically diverse and economically important regions in the U.S. and will recover, once the economy begins to rebound in the medium term. Further, Delta's standing as an anchor tenant serving a majority of the traffic provides a solid base level of revenue and traffic.
Relatively Good Pricing Power - Revenue Risk (Price): Midrange
IAT has historically operated with flexibility to enter into agreements with airlines and set rates that reflect market conditions. Given the pandemic effects on air travel and airline positioning, the rate setting environment could be subject to increasing pressures. Further, IAT's anchor tenant agreement with Delta is essentially a cost recovery methodology which insulates much of the project revenues to traffic performance. Even though IAT has demonstrated a strong track record of relationships with carriers serving lucrative international markets, the expected construction of a new Terminal 1 facility dedicated to international services, may intensify the competitive environment for some time, once construction is completed (expected to be 2026).
Low Capital Needs Near Term - Infrastructure Development & Renewal: Stronger
The terminal facilities are modernized and are not expected to require major renewal in the foreseeable future. The Phase III expansion project, which will increase gate capacity for Delta's growing operations, has been delayed and is pending further review. In the interim, the delay is generating some cash flow relief for the IAT.
Fixed-Rate Fully Amortizing Debt Profile - Debt Structure: Stronger
All of IAT's debt is fixed rate and fully amortizing, maturing prior to the expiration of the Port Authority of New York and New Jersey's (PANYNJ) lease with the City of New York, and Delta's tenant agreement with the terminal. Debt covenants remain standard, with reserves cash funded at their required amounts.
