Fitch Upgrades Port Authority of NY & NJ JFK Bonds to 'BBB' from 'BBB-'; Outlook Stable

Fitch Ratings upgrades to 'BBB' from 'BBB-' the rating on $874 million Port Authority of New York and New Jersey's (Port Authority) special project bonds (JFK International Air Terminal LLC Project (JFK IAT), series 6. The Rating Outlook is Stable. Facility rental payments made by the lessee (JFK IAT) secure the series 6 bonds. The bonds are insured by MBIA Insurance Corp, whose financial strength is rated 'AAA' Rating Watch Negative by Fitch.

The upgrade to 'BBB' reflects the stable legal environment as well as the healthy and improving economic and financial environment surrounding this credit. Key credit considerations include the legal framework that incorporates an extension of the underlying terminal lease and restructured the subordinate debt obligations, a rapidly improving demand profile, combined with the underlying strength of JFK airport as a major domestic and international travel destination, strengthening financial performance and increased levels of available liquidity. Ongoing credit risks include the stand-alone, non-recourse nature of the terminal, the exposure to renewal and credit risk of tenant airlines and very limited rate-making flexibility.

In December 2006, the Port Authority and JFK IAT confirmed recording of supplement lease agreements 3 & 4, which established a repayment and restructuring formula for the subordinate loan, funding levels for various reserves, and a cash flow structure. While execution of this agreement was delayed for over two fiscal years; management and the Port Authority implemented the framework established under the resolution during this period. Also, in November 2004, the City of New York and the Port Authority amended and restated the lease agreements governing operating control of the two NYC airports; thereby, extending JFK IAT's lease and the amortization of the series 6 debt to 2025.

During 2006, JFK IAT's terminal four enplaned 36.8% of JFK's international traffic, up from a low of 26.5% in 2000. Enplanements equaled 3.8 million in 2006 versus 2.5 million in 2000, representing a 7.2% average annual growth rate for a period that included the negative effects of September 11, 2001. These gains are the result of natural intrinsic growth occurring in some of the existing carriers' markets and the capacity constraints at Terminal 1 that are moving airlines back to Terminal 4 (Virgin, Singapore, Swiss). New York City remains the largest international air service market in the United States and JFK accounts for 67% of this service.

Lease payments made by approximately 55 airline tenants and retail providers comprise the bulk of operating revenues and bondholder security. While the 40 airline tenants, providing international air service to different world regions, provide a high level of diversification for an individual terminal and mitigate the risks associated with individual contract renewals, the top 5 airlines (Virgin, Aer Lingus, El Al, jetBlue, and Northwest) represent a sizable 32% of the terminal's passengers. Furthermore, the airline industry remains vulnerable to economic cycles. Management continues to re-gain and re-sign airlines lost to other terminals and extending the current airline tenants' contracts.

The financial picture over the past 3.5 years reflects improving debt service coverage (above the 1.25x rate covenant), and the funding of all financial obligations including subordinate payments. Series 6 debt service coverage continues ascending, from a low of 1.0x during fiscal years 2001-2003 to a healthier 1.47x in fiscal-year (FY) 2006. The healthy cash flow and financial performance in FY2006 resulted in the Port Authority's subordinate debt obligation and first additional land rent being paid, as well as incentive payments, management fees and revenue sharing. Performance to-date in FY2007 indicates further strengthening financials, since debt service coverage is estimated at 1.82x. When compared to similar credits, JFK IAT's FY2006 operating margin of 64% and overall series 6 debt figure of $231 per enplaned passenger are quite strong. Fitch anticipates the project, in its current structure, getting stronger over time. It also is better positioned to handle adverse industry related and economic event.

The current structure includes a $93.4 million cash-funded debt service reserve fund, $2.8 million in an operating and maintenance reserve, $6.7 million in a capital expenditure reserve and $1.5 million in the major maintenance and repair fund. Additional liquidity and flexibility is available, because subordinate debt payments are deferrable without triggering a default under the ground lease. Also, most of the series 6 bonds are now callable, allowing the consortium to investigate potential refunding opportunities for additional economic enhancement. While capital needs are minimal, the JFK IAT management cash funded approximately $1.5 million in capital projects related to gate improvements for the A380 aircraft in fiscal 2006.

JFK IAT is a consortium of three companies formed specifically for this project. Included in the consortium is Schiphol USA Inc., a subsidiary of Schiphol International B.V., whose parent, Schiphol Group N.V., operates Amsterdam Schiphol Airport in the Netherlands. Schiphol's level of expertise and worldwide reputation for managing international airports and developing retail is critical to the continued success of this terminal. Schiphol appears to remain committed to this project and has worked to restructure and increase the financial incentives for both parties. JFK IAT management consistently exhibits the ability to control operating costs, raise revenues, and attract new air carriers.

SOURCE: Fitch Ratings