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16 May 2017
New York, May 16, 2017 -- Issue: Second Indenture Revenue Bonds, Fiscal 2017 Series A (Tax-Exempt); Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $2,154,970,000; Expected Sale Date: 05/23/2017; Rating Description: Annual Appropriation Obligation (Non Lease);
Issue: Second Indenture Revenue Bonds, Fiscal 2017 Series B (Taxable); Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $33,360,000; Expected Sale Date: 05/23/2017; Rating Description: Annual Appropriation Obligation (Non Lease);
Summary Rating Rationale
Moody's Investors Service has upgraded to Aa3 from A2 Hudson Yards Infrastructure Corporation, NY's (HYIC) Senior Revenue Bonds, Fiscal 2012 Series A, and assigned Aa3 ratings to its $2.1 billion Second Indenture Revenue Bonds Fiscal 2017 Series A and $33.4 million Fiscal 2017 Series B.
The second indenture bonds are being issued to current and advance refund nearly all of HYIC's $3 billion outstanding Fiscal 2007 Series A and Fiscal 2012 Series A debt. After closing, $609 million of first indenture Fiscal 2012 Series A bonds will remain outstanding and the first indenture will be closed. The bonds were issued to finance expansion of the Number 7 subway to Hudson Yards to spur economic growth there and for other infrastructure improvements. The original bonds were issued with a 40-year final maturity and no principal amortization. With the refunding, bonds under both indentures will begin to amortize with a level debt service structure and a 2047 final maturity.
The bonds are paid primarily by payments in lieu of taxes (PILOTs) collected by HYIC from commercial properties in the Hudson Yards area and tax equivalency payments (TEPs) from residential properties and hotels collected by the city and appropriated to HYIC. In addition, the City of New York (Aa2 stable) has pledged to cover interest, subject to appropriation, for the life of the bonds if those revenues are insufficient. The ratings, therefore, are derived from the city's credit quality.
The Aa3 rating on both liens is one notch lower than the city's general obligation rating. The one notch distinction reflects our determination of the essential nature of the transportation and other infrastructure projects financed by the bonds, the strong legal structure that obligates the mayor to include the TEPs and an amount sufficient to cover interest in the annual budget, the need for appropriation of those amounts, and potential real estate market volatility that could affect assessed values in the district. The ratings also reflect closure of the first indenture and the relatively small amount of debt left outstanding under it. That effectively means that the city's subject to appropriation interest support benefits second indenture bonds as much or more than first indenture bonds.
The outlook for the Hudson Yards Infrastructure Corporation is stable, based on the City of New York's general obligation rating and outlook, the importance of the project to the city and its strong support of the project's financing.
Factors that Could Lead to an Upgrade
Upgrade of the city's general obligation rating
Additional development well in excess of current forecasts
Significant growth in revenues that do not require appropriation
Factors that Could Lead to a Downgrade
Downgrade of the city's general obligation rating
Weakened political support for the city to pay interest if it is required
A prolonged real estate recession that leads to material declines in assessed values in the district or materially slows additional development and construction there
The bonds are expected to be paid with a mix of major recurring revenue sources and certain one-time ones. The recurring revenues are PILOTs and similar TEPs. Nonrecurring revenues include payments in lieu of mortgage recording taxes; density bonus payments; and certain future development revenue derived from the development potential of the eastern rail yards owned by the MTA. Through the life of the bonds, the recurring sources are estimated to be 96% of all pledged revenue.Recurring revenuePILOTs: Paid by commercial office property owners directly to HYIC. PILOTs are forecasted to average 44% of recurring revenues through bond maturity in 2047.TEPs: Paid by residential, hotel, and other commercial properties. TEP revenues are paid to the city, which has agreed to pay them to HYIC through a support agreement. The city's obligation to pay the TEPs to HYIC is absolute and unconditional, subject to appropriation. TEP revenues average 56% of recurring revenue.Recurring revenue is estimated by HYIC to grow strongly over time, based on growth in assessed values of existing properties and as new properties are constructed in the Hudson Yards district. Recurring revenues solely from existing development increase from $104 million in fiscal 2018 to $908 million in fiscal 2047 when the bonds mature, reflecting average annual growth of 7.5%. Since most existing development is residential but most current construction is office properties, the fastest near-term growth in recurring revenue is office PILOTs.The bonds to be refunded were issued with a 40-year final maturity and no principal amortization until the recurring PILOT and TEP revenues for two consecutive fiscal years provide 125% coverage of maximum annual debt service (MADS), 105% of MADS on all outstanding first indenture bonds and 100% of HYIC operating expenses. That benchmark, defined in the first indenture as the "conversion" benchmark will be reached for the senior bonds remaining outstanding after the current transaction. The second indenture refunding bonds will be issued as fully amortizing and both the senior bonds and the second indenture bonds will have level debt service.City's Commitment to Cover Interest is A Key Credit Factor and Ties the Rating to the City's Credit QualityBecause of potential real estate market volatility and uncertainty about the speed of development in Hudson Yards, when the original bonds were issued, the city committed to pay interest on the bonds if the underlying Hudson Yards revenues were insufficient. That commitment will remain in place for both the unrefunded senior and the refunding second indenture bonds. The city's obligation to make interest support payments is net of any available HYIC funds, and like the TEPs, is absolute and unconditional, subject to annual appropriation.The indenture and a support agreement create a strong legal structure through which the city's interest support payments are budgeted. HYIC is required annually by April 1 to certify to the city's budget director the next fiscal year's net interest obligation (the difference between interest due on senior and second indenture bonds and revenues HYIC expects to have available, up to the total amount of interest due on first and second indenture bonds). The mayor is then obligated to include that amount in the annual budget. In addition, if at any time during the fiscal year the appropriation is not sufficient to pay required TEP and interest support payments, the mayor is required to take any actions needed to seek an increase in the appropriation.In our opinion the risk of non-appropriation by the city is small due to the essential nature of the subway extension and the small budgetary impact of the interest support payments. Maximum aggregate interest totals only 0.3% of estimated fiscal 2018 total city tax revenue (see exhibit). Of New York City's total outstanding debt, a relatively small amount is appropriation debt, about 2.5% (excluding the HYIC interest support commitment). The city's budget reflects a single line-item for debt service on all of its outstanding securities.
Use of Proceeds
Proceeds of the bonds will be used to refund most of HYIC's outstanding debt into a structure that amortizes principal.
The City of New York has a population of 8.5 million, GDP that at nearly $800 billion is larger than all but three states, and real estate full value of more than $1 trillion. Its Aa2 general obligation rating reflects its large and resilient economy, its extraordinarily large tax base, its institutionalized budgetary and financial management controls, its proactive responses to budget strain during economic downturns, the key but diminishing role of the volatile financial services sector, and moderate but growing costs for the combination of debt service, pension, and employee and retiree healthcare.
The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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