image

business forward

Fitch Rates NYC Transitional Finance Authority's $1.2B Bonds 'AAA'; Outlook Stable - Fitch Ratings

Fitch Ratings - New York - 14 Jan 2022: Fitch Ratings has assigned a 'AAA' rating to the following New York City Transitional Finance Authority (TFA) future tax secured (FTS) subordinate bonds, fiscal 2022 series C:

--Approximately $950,000,000 subseries C-1 (tax-exempt); --Approximately $180,995,000 subseries C-2 (taxable); and --Approximately $69,005,000 subseries C-3 (taxable)

In addition, Fitch has affirmed the outstanding TFA senior lien, subordinate lien and recovery subordinate lien FTS bonds at 'AAA'.

The Rating Outlook is Stable.

The subseries C-1 bonds will be sold through negotiated sale the week of January 18, and the subseries C-2 and C-3 bonds will be offered through competitive sale on January 20. Proceeds will be used to fund capital projects for the city of New York and cost of issuance.

SECURITY

The bonds are payable from revenues derived from a personal income tax (PIT) and a sales and use tax (SUT) imposed by New York City, as authorized by the state of New York. Payment of the PIT and SUT revenue to the TFA is not subject to city or state appropriation.

SUT revenues will be available for the payment of bonds if PIT revenues are projected to be insufficient to provide at least 150% of the maximum annual debt service on the TFA's outstanding bonds.

Senior bonds are subject to a $330 million limit on quarterly debt service. Additional bonds may be issued as senior bonds if net tax revenue for the 12 consecutive calendar months preceding authorization is at least 3x the maximum amount of annual senior debt service, including debt service on the bonds to be issued.

The subordinate additional bonds test (ABT) requires that tax revenues for the most recent fiscal year are at least 3x the sum of $1.32 billion plus projected maximum annual subordinate debt service, including debt service on the bonds to be issued. Debt service on variable-rate bonds is assumed at the maximum rate for purposes of the ABT.

ANALYTICAL CONCLUSION

The 'AAA' ratings on the senior and subordinate FTS revenue bonds reflect solid long-term growth prospects for pledged FTS revenues and their highly resilient structure. Fitch anticipates pledged revenues can withstand the current uncertain economic environment and maintain solid debt service coverage (DSC). Fitch's analysis indicates resilience would be strong even if New York City fully leveraged the future tax-secured revenues up to their legally permitted amount, but issuance will likely fall well below that level as excess revenues flow to the city for general operations. A very strong legal structure insulates bondholders from the operating risk of New York City (Issuer Default Rating [IDR] AA-/Stable).

KEY RATING DRIVERS

Strong Legal Framework: The bankruptcy-remote, statutorily defined nature of the issuer pursuant to state legislation and a bond structure involving a first-perfected security interest in the PIT and SUT revenues are key credit strengths. Payment of the PIT and SUT revenue to the TFA is not subject to city or state appropriation. Statutory covenants prohibit action that would impair bondholders.

Robust Resilience: Fitch does not make a rating distinction between the senior and subordinate liens due to the high coverage levels and strong legal and practical protections against overleveraging. Fitch anticipates the security provided for both liens will remain highly resilient through the current economic slowdown and future downturns.

Solid Growth Prospects: Statutory revenues benefit from the city's unique economic profile, which centers on its identity as an international center for numerous industries and a major tourist destination. The character of the New York City economy contributed to its relative employment stability during the Great Recession and sound growth during the ensuing national economic expansion.

Fitch recognizes the severity of the impact of the coronavirus pandemic and related containment measures on the city's economic and revenue base, and believes longer-term growth may slow from historical levels. However, Fitch anticipates growth will be sound following recovery from the effects of the pandemic.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Not applicable.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--A decline in pledged revenues that is more severe and prolonged than anticipated, combined with a significant increase in leverage beyond Fitch's expectation.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

ECONOMIC RESOURCE BASE

The city's economic profile provides for good wealth levels; per capita personal income is about 138% of the U.S. as of 2020, the most recent year for which data is available. However, the above-average individual poverty rate of 17.9% (2019) represents some income disparity. The city's tourism sector is an important driver, with a reported record nearly 67 million visitors in 2019, but now a vulnerability given the reduced tourism activity the past year. The current New York City hotel occupancy rate is about 44% as of early January 2022, up significantly from a year ago but down from around 73% in January 2020.

The city remains an economic force, but after more than a decade of national economic expansion, growth in New York City appeared to be slowing prior to the onset of the pandemic. The city's U.S. census population for 2020 was 8.8 million, up 7.7% since 2010, slightly higher than the national population growth of 7.4%. This remains ahead of the state's 4.2% increase.

Labor market gains were plateauing prior to the pandemic. Since the onset of the pandemic, the city has lost a higher percentage of jobs than the U.S. average and since regained a smaller portion of the lost jobs. From 2019 to 2020, the city lost 517,000 jobs (-11%) due to the pandemic. As of November 2021, total employment in the city was 4,329,600 compared to 4,753,900 in November 2019 and 4,129,600 in November 2020 based on BLS data, which is not seasonally adjusted.

Fitch's most recent labor tracker reports that the metro area has finally recovered 59% of the jobs lost at the start of the pandemic.

DEDICATED TAX CREDIT PROFILE

As a true sale structure, TFA's rating is limited to six notches above New York City's Issuer Default Rating of 'AA-'/Outlook Stable.

Strong Legal Framework Protects Bond Repayment

The rating reflects the bankruptcy-remote, statutorily defined nature of the issuer pursuant to state legislation, a bond structure involving a first-perfected security interest in revenues that are not subject to appropriation, statutory covenants prohibiting action that would impair bondholders, New York State as collection agent and the existence of two separately levied cash flow streams (the statutory revenues).

Pledged Revenue Overview

PIT and SUT revenues are imposed by the city and collected by the state. Revenues from the PIT and the SUT, if required, flow directly from the state comptroller to the TFA trustee, and are not subject to state or city appropriation. The city receives residual revenues only after advance quarterly funding of debt service.

The state is able to unilaterally modify or repeal tax law as it relates to the PIT or SUT, but Fitch believes the risk of this is negligible given the city's dependence on residual revenues for its operations.

Strong Pledged Revenue Growth Prospects

Total FTS revenues grew at a CAGR of approximately 5% in the 10 fiscal years ended 2021. Fitch believes the city continues to have sound economic growth prospects. Given the sensitivity of both PIT and SUT revenues to economic activity, FTS revenue growth is likely to continue to be strong over time despite periodic volatility. Growth in fiscal 2018 was likely attributable to one-time federal tax law changes. Through fiscal 2017, the 10-year CAGR (which incorporates the impact of the 2008 financial crisis) was a still-strong 3.9%.

PIT revenues totaled approximately 70% of fiscal 2021 FTS revenues and are expected to provide most of the growth and volatility in FTS revenue, at least in the near term, due at least partially to the nonrecurring factors mentioned below. Fitch also views growth in PIT revenues as more uncertain than the SUT given the potential changes in residency and commuting patterns due to the prevalence of remote work and the ongoing effects of the 2017 federal tax law changes on taxpayer behavior.

The PIT consists of a base rate and a 14% surcharge. The PIT rate has changed over time, most recently with a base rate increase in 2010. The base rate and 14% surcharge were most recently extended in April 2020 to Dec. 31, 2023. The city's projections assume state legislative approval of the extension of the current rate and surcharge.

Fitch believes the possibility of a failure by the state to approve future continuation of both the current base rate and the 14% surcharge is unlikely. The state has consistently reauthorized both a base rate above the minimum and the 14% surcharge. Such reduction in the rate would also have a significant negative effect on the residual revenues upon which the city relies for its operations. Even in the highly unlikely scenario of failure to reauthorize the surcharge, the coverage cushion remains sound, assuming continued issuance and moderate growth in base PIT and SUT revenues.

Sensitivity and Resilience of Pledged Revenues through Economic Declines

DSC on all FTS bonds from fiscal 2021 pledged revenue was 7.0x. To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP stress scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis.

The Fitch Analytical Stress Test (FAST) model generates a 4.4% scenario decline in pledged revenues in a moderate recession. The largest actual cumulative decline in historical revenues was a sizable 17.9% drop between fiscals 2001 and 2003. A slightly smaller decline occurred in fiscal 2009 amid the financial crisis. Both were due in part to recessions; the former was also affected by Sept. 11, and the latter by adjustments for prior-year PIT overpayments.

Scenario results are consistent with a 'AAA' rating. Fiscal 2021 pledged revenues could decline 80% and still cover pro forma annual debt service of $4.4 billion in fiscal 2025, which incorporates issuance of approximately $19.7 billion of additional FTS bonds for general city capital purposes in fiscal 2022 through fiscal 2025. This is equal to 15x the moderate scenario output and 4x the largest historical decline. Fitch believes issuance to the ABT is highly unlikely given the city's debt issuance plans for FTS revenues and its reliance on residual revenue for its operations.

FTS revenues improved by 2.7% in fiscal 2021 following a modest decline of 0.7% in fiscal 2020. The city's financial plan for fiscal years 2022-2025, dated Nov. 30, 2021, estimates a decline in FTS revenues of about 1.6% in fiscal 2022, with PIT revenues adjusted slightly downward from the original June 30 budget. SUT revenues are projected to outpace fiscal 2021 revenues by 14.6%.

Fitch assumes the city would delay future borrowing plans if FTS revenues fell significantly short of management's expectations to preserve sufficient residual revenues to fund operating expenses.

Pledged PIT revenues are deposited into the collection account daily, with a monthly amount equal to one-half of the debt service payable in the following three-month period.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

New York City Transitional Finance Authority (NY)

  • New York City Transitional Finance Authority (NY) /NYC TFA Future Tax Secured - Subordinated/1 LT
  • New York City Transitional Finance Authority (NY) /NYC TFA Future Tax Secured/1 LT

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

  • FAST Econometric API - Fitch Analytical Stress Test Model, v3.0.0 (1)

ADDITIONAL DISCLOSURES

  • Dodd-Frank Rating Information Disclosure Form
  • Solicitation Status
  • Endorsement Policy

ENDORSEMENT STATUS

New York City Transitional Finance Authority (NY) EU Endorsed, UK Endorsed