New York, January 29, 2021 -- Moody's Investors Service has assigned Aa1 ratings to the New York City Transitional Finance Authority's (TFA's) $900 million Future Tax Secured Subordinate Bonds, Fiscal 2021 Series E, Tax-Exempt Subseries E-1, $204.7 million Future Tax Secured Subordinate Bonds, Fiscal 2021 Series E, Taxable Subseries E-2, and $95.4 million Future Tax Secured Subordinate Bonds, Fiscal 2021 Series E, Taxable Subseries E-3. We also maintain a Aa1 rating on TFA's $90.8 million Future Tax Secured Subordinate Bonds Fiscal 2010 Subseries F-5 in conjunction with its reoffering as fixed rate bonds. The outlook is negative.
RATINGS RATIONALE
The Aa1 ratings reflect strong debt service coverage provided by the pledge of the City of New York (Aa2 negative) personal income tax and sales tax revenues, a strong legal structure that insulates TFA from potential city fiscal stress, the open subordinate lien that permits future leverage of the pledged revenues, and New York State's ability to repeal the statutes imposing the pledged revenues.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action, although it was a factor in our October 1 affirmation of TFA's ratings and the downgrade of the city's general obligation rating.
RATING OUTLOOK
The negative outlook reflects the severe decline in the city's sales and income taxes that have resulted from the deep contraction of the city's economy caused by the coronavirus pandemic.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- For the subordinate lien (which includes the recovery bonds), a higher additional bonds test or other indenture provision increasing bondholder protections against possible dilution of coverage
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Significant weakening of the pledged revenue that reduces currently high levels of coverage
- Large additional bond issuances that materially dilute coverage
LEGAL SECURITY
A key strength of TFA is its insulation from New York City bankruptcy risk. The state legislature established TFA as a separate and distinct legal entity from the city. Further, the state did not grant TFA itself the right to file for bankruptcy. While bondholders are protected from bankruptcy, city or state fiscal stress still could pose risks because both the city and the state retain the right to alter the statutory structure that secures TFA's bonds. The city has covenanted not to exercise those rights related to personal income taxes if debt service coverage would fall below 1.5 times MADS on outstanding bonds. Since the creation of TFA, policy actions have both increased and decreased the pledged revenues. Those actions have included the abolition of the city's income tax on commuters, and establishment of various sales tax exemptions.
TFA's original statutory authorization of $7.5 billion has been increased several times to $13.5 billion (plus $2.5 billion of recovery bonds) for senior and subordinate lien bonds. In 2009, legislation was enacted that allows TFA to exceed the $13.5 billion cap but counts debt over that amount, along with city general obligation debt, against the city's overall debt limit. As of December 31, 2020 the city had $46.3 billion of debt capacity.
The TFA indenture limits senior lien debt to $12 billion outstanding at any time, subject to a $330 million limit on debt service payable in any quarter (as well as the additional bonds test described below). The subordinate lien is open, subject to a conservative additional bonds test that requires at least 3 times the sum of $1.32 billion (covenanted MADS for senior bonds) and annual debt service on outstanding subordinate bonds. Additionally, the indenture requires that calculations of annual debt service reflect variable rate bonds bearing interest at their maximum rate.
The pledged taxes are collected by the New York State Department of Taxation and Finance and held by the state comptroller, who makes daily transfers to the trustee (net of refunds and the costs of collection). The trustee makes quarterly set-asides of amounts required for debt service due in the following quarter on the outstanding bonds, as well as TFA's operational costs (with the collection quarters beginning each August, November, February and May). Half of each quarterly set-aside is made beginning on the first day of the first month of each collection quarter and the second half is made beginning on the first day of the second month of each collection quarter. If sufficient amounts for debt service are not on deposit after those two months, the trustee continues to set aside funds in the third month, on a daily basis, until the deficiency is cured. Functionally, personal income tax revenues are expected to provide sufficient amounts for debt service; if they do not provide at least 1.5 times coverage of MADS, sales tax revenues are available to pay debt service. Additionally, future tax secured bonds issued before November 2006 have a first lien on appropriations of state building aid to the city if necessary to meet debt service requirements.
Based on fiscal 2020 revenue, coverage of aggregate senior and subordinate aggregate maximum annual debt service (MADS) was a very strong 6.1x. Based on a forecasted 7.9% decline in fiscal 2021 pledged, MADS coverage declines to 5.6x, still very strong coverage.
USE OF PROCEEDS
Proceeds of the Fiscal 2021 Series E bonds will be used to help finance the city's capital plan.
PROFILE
TFA was created by the state legislature in 1997 as a public benefit corporation of the state to provide a method of financing New York City's vital capital construction program but outside the constraints of the debt limit imposed on the city by the state constitution.
METHODOLOGY
The principal methodology used in these ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Nicholas Samuels
Lead Analyst
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