Fitch Affirms New Jersey Economic Development Authority PABs at 'BBB'; Outlook Stable
In addition, Fitch has affirmed the 'BBB' rating on the $473.6 million (excluding capitalized interest) Transportation Infrastructure Finance and Innovation Authority (TIFIA) loan to NYNJ Link.
The Rating Outlook on both the PABs and TIFIA loan remains Stable.
The rating affirmation reflects progress to date with the project scheduled to achieve substantial completion by June 19, 2018 and with sufficient funding to achieve completion before the long-stop date. Once operational, the project will receive a stable revenue stream from the highly rated revenue off-taker, the Port Authority of New York and New Jersey (the Authority; senior lien bonds rated 'AA-'; and grantor obligations with respect to the Goethals Bridge project rated 'A'; Outlook Stable for both). In addition, the project's operations will be self-performed by the developer which includes Macquarie Infrastructure and Real Assets, bringing with them significant experience on similar assets. Projected average coverage in Fitch's ratings case is 1.28x and drops to a minimum of 1.16x, consistent with the assigned rating and peer group. The project's peers include Portsmouth Bypass (rated 'A-'/Outlook Stable) and Ohio River Bridges East End Crossing Project (rated 'BBB+'/Outlook Stable).
KEY RATING DRIVERS
Completion Risk - Midrange
Experienced Contractor with Sufficient Security Package: Kiewit Infrastructure Co. (70%), Weeks Marine Inc. (15%), and Massman Construction Co. (15%), all of which have significant experience with similar projects, comprise the Design-Build Joint Venture (DBJV) contractor. Design-build requirements are passed down from the developer to the DBJV contractor. The security package includes parent guarantees from Kiewit Infrastructure Group Inc. and a letter of credit of 4% of the contract price.
Cost Risk - Midrange
The assessment is derived from Midrange assessments of scope risk and cost volatility, and a Stronger assessment of cost predictability. The full scope of operations and maintenance (O&M) and lifecycle (LC) responsibilities are passed to the developer, and there is moderate complexity involved in bridge and tunnel engineering. Structural protections are considered adequate with LC and handback reserve features.
Revenue Risk - Stronger
Availability Payments Supported by Strong Counterparty: Payments supporting construction and operations will be derived from The Port Authority of New York and New Jersey (senior lien bonds rated 'AA-'/Outlook Stable and grantor obligations with respect to the Goethals Bridge project rated 'A'/Outlook Stable). Developer Financing Arrangement (DFA) payments will escalate at 1.5% annually while operational maintenance (OM) and capital maintenance (CM) payments will be indexed to regional consumer price index (CPI) and subject to availability and performance deductions.
Operation Risk - Midrange
Low Operation Risk: Operational functions are expected to be self-performed by NYNJ Link Developer LLC which is ultimately a subsidiary of MIP III (a fund managed by Macquarie Infrastructure and Real Assets (MIRA)) (90% interest) and Kiewit Development Company (KDC) (10% interest). MIRA has extensive experience managing assets in the public private partnership space.
Infrastructure & Renewal Risk - Midrange
Adequate Lifecycle Funding: A forward looking Major Maintenance Reserve and Handback Reserve are present to cover expected life cycle costs.
Debt Structure - Midrange
Fixed Rate, Fully Amortizing Debt with Standard Reserves: The debt service profile consists of fixed rate debt with no refinance risk. The covenant package is considered to be adequate, with debt service reserve funds equal to six months of debt service and a robust equity lock-up trigger of 1.20 times (x).
Sufficient Coverage Ratios: The projected average coverage in Fitch's ratings case is 1.28x and drops to a minimum of 1.16x, consistent with the assigned rating and peer group. Once operational, the project is expected to have a high resiliency to increased costs and still meet debt obligations as demonstrated by an all cost breakeven of 62% which translates into a realistic outside cost (ROC) multiple of over 8x.
The Goethals Bridge Replacement Project is similar to other availability payment structures within Fitch's portfolio, such as Portsmouth Bypass (rated 'A-'/Outlook Stable by Fitch) and Ohio River Bridges East End Crossing Project (rated 'BBB+'/Outlook Stable by Fitch). The projects have comparable construction packages and financial metrics, with Ohio River at an average coverage of 1.28x. However, Portsmouth expects a lower average coverage of 1.22x, and both Portsmouth and Ohio River show higher all cost break-evens at 81% and 64%, respectively, under Fitch's rating case scenarios.
--Construction delays beyond scheduled substantial completion and anticipated final acceptance dates if not properly mitigated;
--Significant payment deductions during construction and operations that reduce coverage levels well below current projections;
--Considerable deterioration of financial counter-parties leading to a weakening in the credit profile of the project.
--Successful completion and sustained operating performance above Fitch's rating case projection.
SUMMARY OF CREDIT
Overall, despite some delays, both the lenders technical advisor (Arup) and NYNJ Link expressed the view that the project is proceeding on budget and on pace to be completed by the long stop deadline. The DBJV is now expecting to achieve substantial completion by June 19, 2018 (172 days later than the original contract date) and final completion by March 19, 2019 (160 days later than the original contract date). At the date of the lenders technical advisor report, there were still 234 days between final completion and the long stop deadline, which the Arup believes to be sufficient. As of September 2016, the project is at 64% completion according to NYNJ Link. The majority of the Eastbound bridge's approach piers and girders are also nearly complete. The lenders technical advisor now considers the installation of the main span bridge superstructure to be of particular importance to the project's progress on the critical path. Arup noted delays caused by weather and high winds in early 2016 that slowed construction on the main span structures.
NYNJ Link has mentioned possible delay risks that could affect completion timing of the main span superstructure, including delays in the production and fabrication of steel, weather-related construction pauses caused by the upcoming winter season, and various pending change orders which could result in additional work. Fitch believes NYNJ Link has adequately mitigated these risks to the extent possible by meeting diligently with the fabricator to ensure timely delivery, and has prioritized critical weather-sensitive construction activities to multiple shifts six to seven days a week. Pending change orders include a significant design change to the pedestrian fence requested by the authority which was not included in the initial design plan, and the removal of hazardous materials on the existing Goethals Bridge. The contractor has performed financial and time-impact analyses for both, and is meeting with the authority to review the changes. NYNJ Link indicated they are protected from the additional costs of these change orders under the Project Agreement.
The PABs are secured by a first priority lien on NYNJ Link net revenues. The TIFIA Loan is secured on a subordinate basis. Senior lien bonds and the subordinated TIFIA loan will be paid from funds available in the Authority's Consolidated Bond Resolution Fund, which are subordinate to the authority's consolidated revenue bonds and deposits to required debt reserves.