New York, June 08, 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 Baa3 from Baa2. Concurrent with the downgrade, the rating remains under review for downgrade.
RATINGS RATIONALE
Today's rating action reflects the prolonged negative enplanement impact which is anticipated to last through 2020 at JFK T1, coupled with the lack of a dedicated debt service reserve or any other meaningful liquidity source at JFK T1 which have caused the terminal to require external liquidity support from its signatory airlines beginning in July to cover its cash flow shortfalls.
The spread of the coronavirus outbreak, the weakened global economic outlook, low oil prices and asset price declines are sustaining a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The airport sector is one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Moody's regards the coronavirus outbreak as a social risk under its Environmental, Social, & Governance (ESG) framework, given the substantial implications for public health and safety that has resulted in severe travel restrictions, cancellation of airline routes, travel bans, border closings and new requirements for health and safety at airports.
Per management's estimates, shortfalls are estimated to approximate $4 million per month starting in July, or $24 million for the remainder of the year, of which each airline would pay its contractual share. We expect Terminal 1 to be reliant on these payments from the signatory airlines to meet their 2020 obligations and possibly 2021 given Terminal 1's relevance as a major international gateway in the New York region. We note that the size of the payments required to maintain the terminal and its debt service costs are relatively small in comparison to the signatory airlines' annual operations.
The signatory airline agreement with the terminal includes a step-up provision where the signatory airlines Compagnie Nationale Air France ("Air France", 34.84%), Japan Airlines International Company Ltd. ("JAL", 18.35%), Korean Airlines Co., Ltd. ("KAL", 16.86%), Deutsche Lufthansa Aktiengesellschaft ("Lufthansa", Ba1 Ratings Under Review - Down, 29.96%), would cover any shortfall with respect to the terminal's debt service obligations on a joint and several basis allocated based on their contractual shares. However, given the ongoing deterioration of the passenger airline sector, and the negative impacts to various airlines' liquidity position; the sole reliance on the step-up provision from the signatory carriers as a mitigant owing to the lack of a DSR or other meaningful liquidity sources is viewed as a heightened 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 labor representatives to alleviate pressures on slot allocations, provide indirect or direct financial support and manage airlines' cost bases.
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. Many airlines operating at the terminal have cancelled flights, including Norwegian Airlines which has cancelled all flights at the terminal since late March. Norwegian Airlines accounted for over 19% of the terminal's market share in FY 2019. In 2020, the terminal had 122,768 enplanements in March, 11,498 in April and an estimated 12,800 in May, which represent 40.2%, 3.4% and 2.0% of the prior year's monthly enplanements, respectively. In June and July, the terminal projects about 21,000 and 70,000 enplanements, or 5.4% and 17.6% of 2019 enplanements for these months, respectively. Management now anticipates enplanement levels to rebound to pre-outbreak levels in 2021, with December 2020 enplanements only at approximately 53% of 2019 levels.
On a positive note, on May 25, 2020, one of the terminal's signatory airlines, Lufthansa, issued a press release stating that it has been informed by the Economic Stabilization Fund of the Federal Republic of Germany that the Fund has approved a EUR 9 billion ($9.8 billion) stabilization package for Lufthansa. The package is being supported by the Executive Board of Lufthansa but the different elements of the package remain subject to approval by the Management and Supervisory Board as well as by the shareholders of Lufthansa and the European Commission. Air France, another signatory airline, is also likely to receive government support as announcements have been made by France's Finance Minister surrounding a package of multi-billion euro loans guaranteed by the government for both the automobile and airline industry. The bailout was further approved by the European Commission. The Korea Development Bank and Export-Import Bank of Korea have also announced that they will be jointly providing approximately 1.2 trillion won ($971 million) in loans to support Korean Air's liquidity.
The terminal has consistently maintained cash balances around $20 million, which equates to 62 days cash in FY 2018 which has historically proved adequate during regular operating periods. As of May 2020, the terminal had approximately $14.4 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. TOGA has made its monthly deposits to the bond trustee of around $2.4 million per month for the first six months of 2020, which will be used to make its $1.97 million debt service payment on July 1, 2020 with the remainder being available toward the larger payment of $26.97 million payment on January 1, 2021. The terminal will deposit approximately $14.5 million in the bond trustee account through the remainder of 2020 which along with operations and maintenance expenditures are expected to be funded in large part by the four signatory carriers beginning in July 2020.
TOGA's finances are managed on a sum sufficient basis. The indenture permits unlimited rolling coverage to meet the 1.25x 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. We expect DSCR in 2020 to be around 1.0x given the terminal will require liquidity support from the signatory airlines to cover shortfalls through the remainder of the year.
The review will focus on (i) evidence of support by the signatory airlines to JFK T1, by honoring the step-up provision requirements under the anchor airline agreements in the short term, (ii) indication of commitment to continued support for the remainder of FY 2020, and likely in FY 2021, and (ii) indication of degree of improvement in enplanement levels at the terminal over the remainder of the year.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
-Given the current market situation we do not anticipate any short-term positive rating pressure. An indication that the market situation has begun to stabilize leading to a gradual recovery of enplanement levels nearing pre-outbreak levels over the next 6-12 months could lead to stabilization of the outlook.
-Higher levels of sustained liquidity at JFK T1 to withstand a prolonged environment of enplanement volatility could lead to stabilization of the outlook
-Clear demonstration of signatory airlines' ability and willingness to support their obligations under the Facility Use & Lease Agreement over the next 18 months
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
-Sustained significant travel reduction from the corona virus outbreak is expected to extend into 2021, and/or recovery is delayed beyond current expectations
-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.
METHODOLOGY
The principal methodology used in this rating was Privately Managed Airports and Related Issuers published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1092224. 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.
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