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Rating Action:

Moody's places JFK International Air Terminal, LLC's Baa1 rating under review for downgrade

19 Mar 2020

NOTE: On March 26, 2020, the press release was corrected as follows: In the Rating Methodology section, the principal methodology was changed to “Privately Managed Airports and Related Issuers published in September 2017.” Revised release follows.

New York, March 19, 2020 -- Moody's Investors Service, Inc. ("Moody's") has placed JFK International Air Terminal, LLC's (JFK IAT) Baa1 rating under review for downgrade affecting approximately $1.15 billion of debt outstanding issued by Port Authority of New York and New Jersey.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil 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 travel industry has been 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 ESG framework, given the substantial implications for public health and safety.

Specifically, the rating review reflects JFK IAT's rising credit risks related to the coronavirus that has materially disrupted travel and will lead to an unknown number of enplanement declines in 2020 and thereafter. Owing to JFK IAT's status as the largest international terminal in New York, the initial impact started with the decline in travel to China, then Korea, and now Europe, Canada and within the US. The initial modest enplanement declines were offset with the addition of LATAM airlines in February, leading to total enplanement growth through March 12 of about 3% year-over-year. This trend will likely reverse over course of the year.

Today's action also reflects our revised expectation of large enplanement declines for the remainder of the year owing to announced airline capacity reductions stemming from material declines in user demand for business and leisure travel, coupled with government travel bans to multiple regions for unknown periods of time. These capacity declines will be broad based but also include the anchor tenant, Delta Air Lines, Inc. (Baa3, rating under review for downgrade) that announced 70% system-wide capacity cuts and 80% international capacity cuts until demand returns. The extent of Delta's capacity reductions at JFK Terminal 4 are unknown as Delta also operates out of Terminal 2 and the LaGuardia airport in the New York region. However, international enplanements are a significant share of Delta's Terminal 4 enplanements, so it is likely a large reduction will occur. Favorably, JFK IAT's Anchor Tenant Agreement with Delta effectively fixes Delta's payments, protecting JFK IAT from variations in Delta's enplanements. This is credit positive as NYC is a key hub for Delta's operations, providing a high incentive for Delta to continue to pay its lease to operate at the terminal. In addition, while most flights to China stopped a month ago, some are returning now that the spread of the virus is waning, yet it remains to be seen if another wave of cases will occur or not. Importantly, JFK IAT's liquidity profile provides a cushion to declining cash flow as it has a cash funded service reserve of more than twelve months of debt service and has other available cash reserves in trustee held restricted accounts.

During its review, Moody's will consider (i) Delta's actions related to capacity at the terminal that could include declines, but subsequent increases if enplanements from other airports or terminals are moved to Terminal 4; (ii) JFK IAT's operating cashflow and liquidity profile over the next 12 months; (iii) Delta's credit quality; (iv) capacity changes for all carriers at the terminal; (v) and any additional travel bans, restrictions or capacity reductions that will further reduce enplanements at JFK IAT.

JFK IAT has a strong market position as an essential asset at a capacity constrained airport in the United States' strongest air travel market resulting in strong demand with a solid enplanement base that is expected to remain relatively sound over the long-run, despite near term declines related to the coronavirus. The Anchor Tenant Agreement with Delta enhances cash flow predictability and protects the terminal during a downside scenario, but also increases JFK IAT's concentration to a single airline at a time of credit stress, yet there is some diversity with Delta offering both regional and international service. JFK IAT's fully amortizing debt profile should result in further deleveraging over the next several years. Moreover, the credit profile does not consider any additional leverage or risks related to the recently announced $3.8 billion Terminal 4 modernization and expansion project given the uncertainty at this point.

What could change the rating Up/Down

The rating could be downgraded if JFK IAT's enplanements decline materially with no sign of rebounding leading to forecast financial metrics remaining weak for a sustained period of time or if Delta's credit quality materially declines.

The rating outlook could stabilize if enplanements and margins return to pre-coronavirus levels at a minimum. The rating could then be upgraded if there is a significant reduction in total debt, increased revenue diversity away from Delta, a material strengthening of Delta's credit quality, improved market position as an international gateway, and clarity on the funding, timing and impact on future financial metrics of the potential Terminal 4 expansion project.

Liquidity

Funds for the May interest payment are already on hand and there is adequate time to collect funds for the November principal and interest payment.

JFK IAT holds $192.6 million in indenture required reserve funds, and the majority (80.8% or $155.7 million) are cash funded debt service reserve funds (DSRF) sized at maximum annual debt service (MADS) for Series 8 at $62.3 million and sized above MADS for Series 6 at $93.4 million compared to a MADS of $77.5 million.

JFK also funds a capital improvement reserve (CIR) and a Major Maintenance and Renewal (MMR) reserve to fund future capital expenditures, which were funded at $21.3 million and $7.1 million, respectively as of January 2020. For operations, JFK IAT maintains an Operations and Maintenance reserve, which held $8.6 million as of January 2020, which covers approximately one month of operating costs.

JFK IAT maintains very little unrestricted liquidity given the annual distribution of excess cash flow -- 10% to JFK IAT and 90% to Port Authority of New York and New Jersey. The terminal's liquidity is derived from indenture required reserves that provide a stable level of liquidity.

Issuer Profile

JFK International Air Terminal, LLC is a special purpose entity whose sole business is the operation of Terminal 4 at John F. Kennedy International Airport in New York, under a lease with the Port Authority of New York and New Jersey (Aa3 stable) that expires on May 23, 2043. The terminal is currently indirectly owned by Schiphol USA, a subsidiary of Royal Schiphol Group N.V. (A1 stable operator of Amsterdam Airport Schiphol), and Delta Air Lines.

Rating Methodology

The principal methodology used in these ratings 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

John Medina
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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