New York, April 01, 2020 -- Moody's Investors Service has revised the outlook on the City of New York to negative from stable. The outlook applies to $38 billion of general obligation debt, $4.5 billion of outstanding appropriation backed debt issued though the Hudson Yards Infrastructure Corporation (HYIC), Health and Hospitals Corporation (HHC), Educational Construction Fund (ECF), the New York City Industrial Development Authority (IDA) and the Dormitory Authority of the State of New York's (DASNY), and $39 billion of outstanding Future Tax Secured revenue bonds issued by the Transitional Finance Authority (TFA). We have also affirmed the Aa1 ratings on the city's outstanding GO debt, the Aa2 ratings on the outstanding appropriation debt, the enhanced Aa2 rating on the DASNY Municipal Health Facilities Improvement Program bonds, the Aaa senior and Aa1 subordinate lien TFA Future Tax Secured bond ratings, and the VMIG 1 ratings assigned to GO and TFA variable rate demand bonds with conditional liquidity support.
The revision of the outlook to negative from stable reflects the impact of the coronavirus crisis on the City of New York. The rapid and widening spread of the outbreak, deteriorating global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
We expect a sudden and severe decline in the city's sales and income taxes as the negative economic effects of efforts to stem coronavirus take hold. Spending cuts and other measures will balance the current year, which ends June 30, but more significant spending reductions will be needed for fiscal 2021 to match lower revenues. The outlook revision also incorporates the mitigating impacts of substantial federal emergency assistance. This includes direct aid to the city through enhanced Medicaid matching and other cash reimbursements, and indirect aid through expanded unemployment benefits and cash payments to individuals that will help support personal income and consumption. Healthy liquidity entering the coronavirus crisis will help the city bridge the gap between extraordinary public health spending and expected federal reimbursements. We expect city revenue to return closer to normal patterns when social distancing ends and the economy starts to normalize.
The Aa1 general obligation rating reflects the strong and diverse New York City economy before the coronavirus crisis. The city's competitive advantages include a young and highly skilled labor pool, access to higher education and medical centers, strong domestic and international transportation links, and low crime rates. Those fundamentals position New York City for strong future growth, especially in media, medical research, and technology, while maintaining its deep strength in financial services.
The rating also reflects the city's ongoing strong budgetary and financial management and the breadth and diversity of its revenue base. The rating also reflects that the city's financing responsibilities are broader than most local governments, since it is a city, five counties and the nation's largest school district, and its debt burden is above-average due to this operational scope. Still, the city's fixed costs for debt service, pensions and retiree health care are below the median for the largest local governments and in the bottom five among the nation's largest cities.
The Aa2 rating is a one notch distinction for the Hudson Yards Infrastructure Corporation bonds 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 tax equivalency payments and an amount sufficient to cover interest shortfalls, if any, in the annual budget, the need for appropriation of those amounts, and potential real estate market volatility that could affect assessed values in the Hudson Yards district. The ratings also reflect the closed nature 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 one notch distinction for the HHC health system bonds reflects the essential city services it provides; the strong relationship between HHC and the City of New York, including the city's statutory obligation to restore HHC's capital reserve fund if necessary; and other features of the moderate legal structure including a gross pledge of HHC's sizeable health care reimbursement revenues and a lock box mechanism that collects the revenues and uses them to pay debt service before they flow to HHC for operations.
The one-notch distinction for the ECF bonds is based on the city's obligation to make lease payments in amounts sufficient to pay debt service when due, subject to appropriation, the essential nature of the school projects financed with the bonds, and the moderate legal structure that, in addition to the need for appropriation, includes the ability of ECF to initiate a mechanism to intercept appropriations of education aid from the State of New York if necessary should the city not appropriate sufficient amounts to replenish the debt service reserve fund.
The one notch distinction for the IDA special revenue bonds is based on the less essential nature of the economic development project and a moderate legal structure that reflects the city's absolute and unconditional obligation to make lease payments, subject to appropriation, regardless of the project's completion.
The enhanced Aa2 on the DASNY Municipal Health Facilities revenue bonds reflects the credit quality of the City of New York and its absolute and unconditional obligation to make rental payments to DASNY in amounts sufficient for debt service, subject only to appropriation. The rating also reflects DASNY's ability, through the comptroller of the State of New York to intercept available state appropriations of Medicaid aid to the city to ensure timely debt service payments even if they city does not appropriate.
The Aaa and Aa1 TFA Future Tax Secured revenue bonds ratings reflect very high debt service coverage provided by the pledge of the City of New York 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.
The affirmation of the short-term general obligation and TFA conditional liquidity ratings reflects (i) the credit quality of the various banks acting as liquidity support providers under the standby bond purchase agreements (SBPAs); and (ii) our assessment of the likelihood of an early termination of each SBPA without a mandatory tender.
The negative outlook reflects the sudden and severe decline in the city's sales and income taxes as the negative economic effects of efforts to stem coronavirus take hold, and the significant actions the city will need to take to balance the budget in the next year and possibly beyond.
Factors that would lead to an upgrade or downgrade of the ratings:
FACTORS THAT COULD LEAD TO AN UPGRADE
- GO: Stronger reserves, at levels similar to higher-rated peers, or establishment of formal policies to increase reserves
- GO: Reduction of debt burden or further reduction in fixed costs
- HYIC, HHC, ECF, IDA: Upgrade of the city's general obligation rating
- HYIC: Additional development well in excess of current forecasts
- HYIC: Significant growth in revenues that do not require appropriation
- DASNY municipal health facilities: Upgrade of the state's rating
- TFA subordinate lien 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
- GO: Divergence from well-established fiscal practices and strong budgetary management
- GO: Emergence of significant liquidity strain, especially that results in the need for large cash-flow borrowing
- GO: Negative change in economic fundamentals outside normal economic fluctuations
- HYIC, HHC, ECF, IDA: Downgrade of the city's general obligation rating
- HYIC: Weakened political support for the city to pay interest if it is required
- HYIC: A prolonged real estate recession that leads to material declines in assessed values in the district
- ECF: Failure by the city to appropriate funds for debt service or to restore the debt service reserve
- IDA: Failure by the city to appropriate funds for debt service
- DASNY municipal health facilities: Downgrade of the state's rating
- DASNY municipal health facilities: Failure of the intercept program's mechanics to make sufficient state aid available to pay debt service
- TFA subordinate lien bonds: Significant weakening of the pledged revenues that reduces currently high levels of coverage
- TFA subordinate lien bonds: Large additional bond issuances that materially dilute coverage
The general obligation bonds are full faith and credit obligations of the city, secured by a real property tax levied without limitation as to rate or amount. All of the city's property tax is deposited into the general debt service fund, which is administered and maintained by the state comptroller.
The Hudson Yards bonds are payable 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 has pledged to cover interest, subject to annual appropriation, for the life of the bonds if the TEP revenues are insufficient. The ratings, therefore, are derived from the city's credit quality.
HHC's bonds are paid by a gross pledge of its sizeable health care reimbursement revenues and a lock box mechanism that collects the revenues and uses them to pay debt service before they flow to HHC for operations. The rating is derived from New York City's legal obligation to fund any shortfall in HHC's Capital Reserve Fund, subject to annual appropriation.
The Educational Construction Fund bonds are payable from city rental payments for the school portion of combined facilities projects in amounts equal to principal and interest on the bonds, subject to annual appropriation.
The IDA bonds are payable from monthly city rental payments equal to the sum of principal and interest coming due in the next succeeding month and any amounts owed under any credit facility. The city's obligation to make rental payments is absolute and unconditional, regardless of the project's commencement, completion, or availability for use and occupancy, subject to annual appropriation.
The DASNY Municipal Health Facilities bonds are payable through a master lease between DASNY and New York City, rental payments in an amount equal to debt service on all outstanding bonds are an absolute and unconditional obligation of the city, subject only to annual appropriation. The city has covenanted in the lease to include an amount sufficient for debt service in each annual budget.
The Transitional Finance Authority's bonds are payable from pledged personal income and sales taxes 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 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.
USE OF PROCEEDS
New York City, the largest city in the United States, is large and diverse, with a population of 8.4 million people and above average wealth levels: personal income per capita is 141% of the US level. The size and scope of the city's operations are broader than most local governments: in addition to the city government, New York City is five counties and the nation's largest public school system, with 1.1 million students. New York City's GDP is larger than all but four states.
The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1191097. The principal methodology used in the long-term underlying lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. The principal methodology used in the DASNY Municipal Health Facilities rating was State Aid Intercept Programs and Financings published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1067422. The principal methodology used in the long-term underlying special tax ratings was US Public Finance Special Tax Methodology published in July 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1077147. The principal methodology used in the short-term enhanced ratings was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057134. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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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