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Rating Action:

Moody's downgrades New York Transportation Development Corporation, NY's Special Facility Revenue Refunding Bonds, Series 2015 (Terminal One Group Association, L.P. Project) to Baa2 from Baa1; rating placed under review for downgrade

19 Mar 2020

Approximately $125.3 million of rated debt affected

New York, March 19, 2020 -- Moody's Investors Service has downgraded the rating on the New York Transportation Development Corporation, NY's Special Facility Revenue Refunding Bonds, Series 2015 (Terminal One Group Association, L.P. (TOGA) Project, or JFK T1) to Baa2 from Baa1. Concurrent with the downgrade, the rating was placed under review for downgrade.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to government travel restrictions and sensitivity to consumer demand and sentiment. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

JFK T1 is being directly affected given the terminal's international only traffic, with more than 65% of its enplanements derived from Europe and Asia. Several airlines operating at the terminal have cancelled flights, including Norwegian Airlines which currently has cancelled all flights at the terminal. Norwegian Airlines accounted for over 700,000 enplanements in FY 2019, or over 16% of the terminal's market share.

Given the uncertainty surrounding the duration and severity of travel disruption over the coming months, the terminal does not have the necessary liquidity to withstand a possible prolonged period of volatility since it lacks a dedicated debt service reserve (DSR). The signatory airline agreement with the terminal includes a step-up provision where the signatory airlines Compagnie Nationale Air France ("Air France"), Japan Airlines International Company Ltd. ("JAL"), Korean Airlines Co., Ltd. ("KAL"), Deutsche Lufthansa Aktiengesellschaft ("Lufthansa", Ba1 Ratings Under Review), would cover any shortfall with respect to the terminal's debt service obligations. However, given the ongoing deterioration of the passenger airline sector, including the recent downgrade of one of the terminal's signatory airlines, Lufthansa, and the negative impacts to various airlines' liquidity position; the reliance on the step-up provision from the signatory carriers as a mitigant to the lack of a DSR is viewed as an increasing weakness in the current unique volatile environment. Moody's also anticipates that the airline industry will require continued and further support from regulators, national governments and labour representatives to alleviate pressures on slot allocations, provide indirect or direct financial support and manage airlines' cost bases.

The terminal has consistently maintained cash balances around $20 million, which equates to 62 days cash in FY 2018 which has proved adequate during regular operating periods. As of March 2020, the terminal had approximately $20 million in cash, in addition to minimum annual guarantees (MAG) from contract carriers generally secured by cash or letters of credit equivalent to two-months-worth of fees. The terminal does not anticipate the step-up provision being triggered in 2020, assuming traffic normalizes in the summer months and beyond. Under the agreement with the signatory airlines, any shortfall would have to be covered no later than one business day prior to debt service being due, with notices provided at least 20 days prior to the due date. We note that the step-up provision has never been triggered in the past, and that the necessary liquidity would have to be provided in a timely manner in order to avoid any debt service payment defaults.

TOGA's finances are managed on a sum sufficient basis. The indenture permits unlimited rolling coverage to meet the 1.25 times rate covenant, and the signatory airline agreements require rates be set at a level sufficient to ensure that a reserve equal to 25% of total costs is maintained. The debt service coverage ratio (DSCR), as calculated by Moody's has historically measured around 1.0x to 1.5x on a net revenue basis, given the terminal's cost minimization business model which typically only allows it to charge and collect rates from the airlines to cover its operating and debt service costs.

In fiscal 2018 and 2017, debt service coverage on a bond ordinance basis was 1.71x and 1.63x, respectively, and will likely be around this level in fiscal 2019. Per Moody's calculation on a net revenues basis, which excludes available liquidity, DSCR was 1.38x in FY 2018. While previous expectations were that coverage would be similar going forward, a weaker performance expected this year due to ongoing air travel disruptions could potentially result in coverage of 1.0x, assuming traffic returns to normalized levels beginning in the summer months and is maintained going forward. However, in a scenario where enplanements do not return to normalized conditions and potentially result in a 50% reduction from prior year's levels, DSCR could be less than 1.0x and require a sizeable step-up payment from the signatory airlines.

The review process will be focusing on (i) current market condition and developments, including travel restrictions affecting enplanements at the terminal over the next few weeks, (ii) liquidity level and any measures taken by the terminal to improve its liquidity condition, (iii) any support provided to signatory airlines by their respective national governments which would indicate increased ability to effect their step-up provision requirements.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Given the current market situation we do not anticipate any short term positive rating pressure. An indication of stabilization of the market situation leading to a return of enplanement levels to pre-outbreak levels by the summer months and beyond could lead to positive rating pressure.

- Stronger bondholder security such as a debt service reserve fund and higher levels of sustained liquidity to withstand a prolonged environment of enplanement volatility could lead to positive pressure or stabilization.

- Clear demonstration that signatory airlines have the ability and willingness to support their obligations under the Facility Use & Lease Agreement

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Sustained significant travel reduction from the corona virus outbreak is expected to extend beyond one quarter going into the summer months, and/or recovery is expected to be delayed

- Indications that signatory carriers are unable or unwilling to honor their step-up like obligation under the Facility Use & Lease Agreement when needed

- Contract carrier revenues drop sharply and/or carriers are not timely in their payments

- A material deterioration in the signatory carriers' credit profiles

LEGAL SECURITY

The Series 2015 bonds are secured by the pledge of TOGA's unconditional, step-up like obligation to pay loan payments under the Loan Agreement with the New York City Transportation Development Corporation, in an amount designed to cover debt service costs. A Cost Sharing Agreement has been entered between TOGA and the signatory carriers, obligating the signatory carriers to make payments to TOGA in the same proportion as their share was under the Facility Use and Lease Agreement. Additionally, there is a 1.25 times DSCR rate covenant, which can include cash on hand in the calculation. There is no debt service reserve fund or additional bonds test.

PROFILE

Terminal One Group Association L.P., was organized in 1994 as a limited partnership to lease, finance, construct, maintain, and operate Terminal One at JFK International Airport located in New York City. Terminal One serves a population of over 8 million people and handles about 12% of total passenger traffic at the airport. Each of the four signatory carriers - Compagnie Nationale Air France ("Air France"), Japan Airlines International Company Ltd. ("JAL"), Korean Airlines Co., Ltd. ("KAL"), and Deutsche Lufthansa Aktiengesellschaft ("Lufthansa") - owns a 24.75% partnership interest in TOGA while the remaining 1% is owned by the general partner, Terminal One Management, Inc. ("TOMI"), which is also equally owned by the four signatory carriers. As laid out in the partnership agreement, TOGA will exist until December 31, 2032, unless TOMI decides to extend its existence to a date prior to or on December 31, 2067.

TOGA's existing "site lease" of the current JFK Terminal One location expires on May 27, 2023 and TOGA has the option to request a lease extension until May 27, 2028. Given the upcoming large expansion of the terminal expected to begin in 2020 with a new group of equity sponsors, and a new lease already approved by the Port Authority board this past November, we do not anticipate the current lease being extended. The existing debt matures on January 1, 2023, which is prior to the current lease expiration. In the event leverage associated with the new lease is incurred which encumbers the existing debt outstanding, it could place negative pressure on the rating.

METHODOLOGY

The principal methodology used in this rating was Privately Managed Airports and Related Issuers published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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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Jennifer Chang
Lead Analyst
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Kurt Krummenacker
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