Fitch Affirms United Nations Development Corp.'s 2009 Rfdg Bonds at 'A '; Outlook Stable
The Rating Outlook is Stable.
The bonds are special obligations of UNDC, secured by a pledge of the project's net revenues from the lease agreements of the United Nation (UN) Plaza buildings (net of operating expenses) and the amounts in the funds and accounts held by the trustee. There is a cash funded debt service reserve sized at maximum annual debt service on the bonds.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: The 'A+' rating reflects sound operating and financial history as demonstrated by a debt service coverage ratio (DSCR) that increased to 2.47x in 2014 from 2.38x in 2013. Debt service remains level for remainder of the term of the bonds.
LEASE TERMS: The leases for One UN Plaza and Two UN Plaza expire prior to bond maturity in 2026. Fitch believes the value of the properties for either rental or sale provides sufficient assurance that the bonds will be repaid through maturity if the leases are not renewed. In addition, New York City has agreed to provide support upon certain conditions if the leases are not renewed.
CASH FUNDED RESERVE: The presence of a cash funded debt service reserve fund sized at maximum annual debt service adds to bond holder security.
FAILURE ON LEASE PAYMENTS: If a tenant fails to make lease payments this may negatively impact cash flow and debt service coverage. The UN, UNICEF, and/or the foreign missions have the potential to assert sovereign immunity, which could delay or prevent UNDC from enforcing a judgment for rent or evicting a tenant.
DECLINE IN OPERATING PERFORMANCE: Building operating expenses could climb significantly and/or upon renewal of the leases, rent rates may not keep up with cost increases. This may negatively affect debt service coverage.
RENTAL OR SALE VALUE: Upon non lease renewal, indications that the condition or value of the properties would not support either rents sufficient to make debt service payments or sale value sufficient to redeem the bonds would result in a rating downgrade.
Governance and Management
Fitch reviews the effectiveness of a governing body and senior administration in establishing and implementing UNDC's policies and principals to assess the issuer's creditworthiness. While neither the UN nor UNICEF is rated by Fitch, the UN, UNICEF, and the UN mission tenants have historically met lease payment requirements in a timely manner.
UNDC is a State public benefit corporation that provides office space under long-term leases to the UN, UNICEF, and several UN missions. UNDC's buildings have low vacancy rates and generate steady rental income, with both expected to continue given the long-term lease through July 2026 with UNICEF at Three UN Plaza, and the leases with the UN at One and Two UN Plaza through March 2018 with an option for the UN to extend the leases for five years to 2023.
The UN, UNICEF, and/or the foreign missions have the potential to assert sovereign immunity, which could delay or prevent UNDC from enforcing a judgment for rent or evicting a tenant.
Fitch's analysis of UNDC's financial profile includes a quantitative assessment of operational performance, liquidity and debt load, as well as a qualitative review of the factors that can modulate risk levels indicated by financial metrics.
For fiscal years 2014 and 2013, debt service coverage was 2.47 and 2.38 times(x), respectively. Debt service coverage overall has performed as originally projected when the 2009 bonds were issued. Debt service for the 2009 refunding bonds is level until final maturity of 2026.
UNDC also generates approximately \\$10 - \\$12 million annually in net revenue after debt service and base City rental payments.
The debt service reserve fund for the 2009 refunding bonds is fully funded at maximum annual debt service. UNDC has a strong investment policy which stipulates that funds are invested in short-term U.S. Government and New York State obligations or other short-term and high-grade securities.
Fitch's analysis considers UNDC's ability to efficiently employ capital assets to generate cash flow from operations sufficient to meet debt service obligations and ongoing capital renewal and expansion.
Project operations consist of the leasing of approximately 960,000 square feet of office space in One, Two, and Three UN Plaza and approximately 7,500 square feet of office and retail space. All properties are within the UN Development District in a highly desirable midtown location.
Project revenues broken down by annual billing amounts come from leases associated with the three buildings - One (37%), Two (40%), and Three UN Plaza (22%). All buildings are currently 100% leased. Operating expenses for these building declined by 3.5% in 2014 after an increase of 5% in 2013.
The UN currently leases the majority of office space in One, Two and Three UN Plaza at below market rents. The leases with One UN Plaza and Two UN Plaza expire in 2018 with a five year renewal option, while Three UN Plaza has a longer term expiring in 2026. If the UN decides not to extend its leases with One and Two UN Plaza in 2018, notification would need to be given to UNDC by 2016.
UNDC pays base rent and real estate taxes to the city annually. In 2014, \\$3.0 million in real estate taxes and city rent was paid on all properties owned and operated by UNDC. All real estate taxes and city rent are subordinate to bond debt service.
Project operating cash flows continue to fund scheduled reserve and replacement (R&R) funds for future capital needs. The renewal and replacement fund receives approximately \\$3-\\$5 million per year historically. Most of the amount in the R&R fund is currently committed to large maintenance and capital projects such as facade work to the buildings.
Potential for New UN Consolidation Building
The UN has identified a long term need for consolidated office space in New York City. UNDC has proposed the construction of a new office building which would permit the UN to consolidate office space from multiple locations in New York City into a single location. The proposed site for this project is currently controlled by New York City. To date, the UN has made no commitment to developing a new building and is continuing to consider possible options for meeting its space needs. According to UNDC's 2014 financial statements, a decision on space needs by the General Assembly is expected to occur in late 2015 or early 2016.
A 2011 memorandum of understanding (MOU) between the city and New York State was amended in September 2015 to state that if the UN proceeds with its plans for a new building, the UN must exercise its options to continue leasing space at One and Two UN Plaza from 2018 to 2023, or, if earlier, to the date on which no less than 90% of the new UN building is occupied by the UN and the UN no longer occupies One and Two UN Plaza. This gives the UN an opportunity to end its leases prior to 2023 at One and Two UN Plaza. Under the MOU, in the event of a sale or refinancing of One and Two UN Plaza, proceeds would be used to first redeem the existing bonds as provided by the indenture, with net proceeds paid to the city; including funds for the city's completion of a greenway. Upon a new bond financing for a UN consolidation building, deposits of \\$70 million to the Eastside Greenway and Park Fund and \\$40 million to the City's General Fund would be made as a condition of the amended MOU.
NEW YORK CITY BACKUP LEASE
There is a backup lease from New York City which provides that if the UN vacates the space at One and Two UN Plaza, and if at that time One and Two UN Plaza have not been sold, the space previously leased to the UN is not otherwise rented, and the bonds have not been repaid, the city will lease that space for the city's use to replace rental revenues previously paid by the UN. The backup lease from NYC will remain in place whether or not the new building is constructed, until the earlier of (i) the date on which One and Two UN Plaza are sold and (ii) the date on which the 2009 refunding bonds are no longer outstanding.
Fitch believes that the condition or value of the properties would support either rents sufficient to make debt service payments or sale value sufficient to redeem the bonds.
The city is currently rated 'AA' with a Stable Outlook. The City's obligations under the backup lease if effective would be subject to annual appropriation risk and Fitch does not view them as debt of the city.
Fitch considers/evaluates UNDC's ability to service planned debt from existing operations and comply with bond legal provisions.
UNDC has \\$1.5 million outstanding in special obligation bonds (1978 and 1980 series). These bonds pay interest only (\\$123 thousand annually) and those payments are senior to the payment of debt service on the 2009 refunding bonds. Fitch does not rate the 1978 and 1980 bonds. This debt service payment is factored into the 2009 refunding bond debt service coverage calculations.
The 2009 refunding bonds are fixed rate and have a final maturity of 2026. The issuance of additional bonds is permitted upon certain conditions. UNDC management reports that it does not have plans to issue additional parity debt in the near term.
Financing for any new consolidated UN building would be separate from any financing under the bond indenture for the 2009 refunding bonds, and would be secured by revenues generated from a UN lease for the new building.