Fitch Affirms Hudson Yards Infrastructure Corp. (NY) Senior Revs at 'A'; Outlook Stable
--$3 billion in outstanding senior revenue bonds.
The Rating Outlook is Stable.
The bonds are special obligations of HYIC payable from a combination of recurring and non-recurring revenues expected to be generated from development in the Hudson Yards area of Manhattan.
Recurring revenues include payments in lieu of taxes (PILOTs) under agreements between property owners in the project area and the New York City Industrial Development Agency (NYCIDA) or Metropolitan Transportation Authority (MTA) and tax equivalency payments (TEPs) representing an amount equal to real property taxes. PILOTs flow directly to the bond trustee and TEPs must be appropriated by the city.
Non-recurring, development-related revenues include payments in lieu of mortgage recording taxes (PILOMRTs) which are made as part of PILOT agreements, district improvement fund bonus payments (DIBs) made in exchange for approval of greater density than base zoning allows, and proceeds from the sale of the transferrable development rights (TDRs) of the eastern rail yards.
Bond interest is further payable from support payments from the City of New York, subject to annual appropriation, sufficient to enable the corporation to pay interest on the bonds to the extent project revenues are insufficient for such purpose. The city is not obligated to pay principal on the bonds. The indenture allows another $500 million in parity debt, or the issuance of subordinate debt, but such issuance would require a city council resolution to increase the amount of interest support.
KEY RATING DRIVERS
CITY APPROPRIATION SUPPORT: The 'A' rating is primarily supported by New York City's obligation, subject to appropriation, to pay interest on the bonds if project revenues are insufficient for this purpose. Fitch rates the city's general obligation (GO) bonds 'AA' with a Stable Outlook.
PRINCIPAL REPAYMENT DEPENDENT ON DEVELOPMENT: HYIC's ability to repay principal relies on prospective development. Fitch believes long-term development prospects are positive, and activity at the site has increased. However, continued implementation may be negatively affected by delays in project completion, competition from other development projects, and changes in the broader economy and the real estate and financial markets.
FLEXIBLE, LONG-DATED PRINCIPAL SCHEDULE: The bonds have a nominal final maturity of April 1, 2047 and scheduled principal payments do not commence until the project has demonstrated self-support from recurring revenues. The amortization structure, in conjunction with the city's interest payment commitment, allows time for construction and development delays and the phase-out of tax incentives.
SOUND AREA AND BROADER ECONOMY: The project area is near the city's midtown central business district, whose lack of development capacity restrains future new office building space. Fitch believes the project benefits from the city's unique role as a national and international center for commerce and culture.
CHANGE IN CITY RATING: A change in New York City's GO rating could lead to a change in the rating on the HYIC bonds.
CONVERSION PROSPECTS: Evidence that the project may not achieve self-sufficiency over the longer term could lead to downward rating pressure, as concerns would arise about eventual principal repayment. Strong coverage of principal and interest from recurring project revenues after the conversion date could lead to a higher rating.
NYC CREDIT SUPPORT
The city's interest support, in conjunction with the flexible principal repayment structure noted below, serves as the underpinning of the rating. The city's interest support commitment is for the life of the bonds. Interest is subordinate to principal prior to the conversion date to insure that project revenues are applied first to principal, thus maximizing the benefit of the city's support. For more information on New York City's rating, see 'Fitch Rates New York City's (NY) $915MM GOs 'AA'; Outlook Stable,' dated July 24, 2015.
The mechanism for this backstop, which is laid out in an agreement between HYIC and the city, provides that by April 1 of each year the corporation shall provide the city with the expected amount of interest support needed in the following fiscal year for inclusion in the mayoral budget submitted to city council. The request for interest support is included in the city's general debt service appropriation bill. If at any time the appropriation enacted for such fiscal year is no longer sufficient, the mayor shall take action to seek an increase in the appropriation from city council.
The city made $39 million in interest support payments to the corporation in fiscal year 2014 and $28 million (unaudited) in fiscal 2015. Total interest expense in each year was $153 million, with the balance paid from HYIC's mostly non-recurring project revenues and other accumulated funds. The fiscal 2016 budget for HYIC indicates that no city interest support will be required for fiscal 2016 and 2017 since accumulated developer payments and recurring PILOT and TEP payments are sufficient to make interest payments. Interest in fiscal 2018 and 2019 is projected to be paid through a mix of project revenue, accumulated funds, and city support payments. The HYIC projections conservatively do not assume developer payments until received.
FLEXIBLE BUT LONG-DATED BOND STRUCTURE
The revenue bonds are structured as term bonds with a final maturity of Feb. 15, 2047. No sinking fund installments shall be scheduled until the conversion date, which is the date upon which the corporation certifies to the trustee that recurring revenues (net of corporation expenses) for each of the immediately preceding two fiscal periods equal at least 125% of maximum annual debt service (MADS) on outstanding senior bonds and 105% of MADS on all outstanding bonds. MADS is calculated assuming level or declining debt amortization beginning in the fiscal year after conversion. Subsequent to the conversion date, the obligation of the corporation to pay sinking fund installments on outstanding bonds is only to the extent that money is available.
Prior to conversion, all project revenues must be used to pay bond interest and corporation expenses. If excess revenues are available after interest has been retained for the subsequent fiscal year, they can be used to pay down principal once bonds are callable. No project revenue flows to the city until after conversion, except for reimbursement for bond interest paid by the city in that fiscal year, if any.
HUDSON YARDS DEVELOPMENT
Bond repayment ultimately relies on revenues expected to be generated from development in the Hudson Yards area of Manhattan. The project area is a roughly 45-square-block area from West 43rd Street, 7th & 8th Avenues, to 30th Street, 11th & 12th Avenues. In 2005, the city re-zoned this area from primarily manufacturing and low-density commercial use to allow for a medium- to high-density (office building, hotel, residential) extension of the midtown central business district. Consistent with the city's demonstrated support of the project, the NYCIDA has adopted tax incentives for the area to encourage commercial development.
In 2008, development rights to 11.9 million square feet (msf) of space constituting the east and west rail yards (ERY and WRY) were awarded by the MTA to The Related Companies (Related). A total of 10 msf of commercial space is under construction, with another 10 msf planned, and 5,600 residential units and 4,100 hotel rooms are complete. Another 3,500 housing units are planned.
Construction on the first office tower in the ERY, 10 Hudson Yards, is under construction with expected occupancy in 2016. A majority of the 1.7 million square feet of space, which will house the headquarters of Coach and L'Oreal as well as offices of SAP, has been leased. Construction on a second tower, 30 Hudson Yards recently commenced It is expected to be among the tallest buildings in the world and will include the headquarters of Time-Warner Inc. Occupancy is forecast for 2018. Another five commercial sites are in the planning phase.
ACTUAL AND PROJECTED REVENUE
A 2011 update to a Cushman & Wakefield (C&W) demand and development study from 2006 projected demand for 50.6 msf of new mixed-use development in the project area. City officials report that their current expectations remain largely in line with the 2011 C&W report.
In the C&W study, total recurring and non-recurring revenues through 2050 were projected in 2011 at $35.1 billion and $1.8 billion, respectively, more than sufficiently supporting debt service payments on the bonds. Receipts to date (since fiscal 2006) total $1.2 billion, including $370.8 million in unaudited receipts for fiscal 2015. The first PILOT payment was received in fiscal 2014. Recurring revenues (PILOTs and TEPs) totaled $40.2 million and $53.1 million in fiscal 2014 and 2015 (unaudited), respectively. The 2011 C&W update projected MADS after conversion at between $241 million and $335 million, based on varying assumption about the pace of development and revenues available to redeem bonds early. City officials project conversion to occur in 2026.
SUBWAY LINE EXTENSION
To foster private development, the city committed to fund the extension of the #7 subway line west and south to a new station at 11th Avenue and 34th Street. The subway extension is critical to the Hudson Yards project; office building development in Manhattan is dependent on subway access, as the area is currently underserved. Upon completion of the subway extension most of the Hudson Yards will be within a 10-minute walk of a subway station.
The subway extension is the largest public infrastructure component of the Hudson Yards project, and the bulk of HYIC bond proceeds are for this purpose. The extension was originally expected to be available for revenue service in 2013, but is now expected to be operational in September 2015. The project is on budget. Phase 1 of a public park and boulevard in the project area is now open.
The HYIC is a local development corporation created by the city to finance the Hudson Yards project. HYIC does not engage in the development directly, but finances the development which is managed by Hudson Yards Development Corporation (HYDC) in coordination with the city, the MTA, the New York City Economic Development Corporation (NYC EDC), and the city's Office of Management and Budget (OMB). The majority of the members of the board of directors of both HYIC and HYDC are appointees of the New York City mayor, and the staff of both organizations is largely comprised of members of OMB and former officials of the NYC EDC.