Fitch hands New York MTA its latest downgrade

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In the latest COVID-19 related rating action against New York’s Metropolitan Transportation Authority, Fitch Ratings late Thursday downgraded the MTA’s primary credit, transportation revenue bonds, to A-plus from AA-minus.

Fitch removed its long-term rating from rating watch negative and assigned a negative outlook.

According to a Fitch statement, the downgrade and lowered outlook “reflect the risk to significant deterioration of the MTA's finances precipitated by the coronavirus outbreak and its unprecedented effect on system utilization and revenue.”

An MTA employee walks through a nearly empty Grand Central Terminal in New York.

Fitch believes these pressures compound the challenges the MTA faced before the virus outbreak and weaken the agency's prospects for credit quality improvement through the end of 2021.

That rating also applies to roughly $800 million TRB Series 2020C climate-certified bonds the MTA intends to sell through negotiation, with the sale date and par amount subject to market conditions. The authority intends to retire outstanding transportation revenue bond anticipation notes, Subseries 2018B-1 and 2019B-2.

Ridership has been down as much as 90% on the MTA's subways since many businesses closed and workers have been staying at home.

The state-run authority, which operates New York City's subways and buses, two commuter rail lines and several bridges and tunnels, is one of the largest municipal issuers with roughly $45 billion in debt.

S&P Global Ratings last week downgraded the TRBs to A-minus from A, while Moody’s Investors Service and Kroll Bond Rating Agency put the authority on reviews for possible downgrades.

The authority stands to receive nearly $4 billion under the $2.2 trillion federal rescue bill that passed in late March.

Transit systems nationwide have suffered from social distancing and shelter-in-place measures intended to minimize the virus spread. "There is perhaps no municipal sector that has been hit as severely as U.S. mass transit as a result," said Tom Kozlik, head of municipal strategy and credit for Hilltop Securities.

In more positive news for the MTA Thursday, the authority got some budgetary wiggle room thanks to actions by the state and city.

The enacted state budget will allow the MTA to tap revenue from a planned congestion pricing mechanism for Manhattan to patch massive deficits in its operating budget. The enabling legislation for congestion pricing, passed last year, called for a lockbox on capital funds.

Other provisions increase city funding for paratransit up to $250 million in 2020, capping out at $310 million in 2023; increasing the MTA bond cap to $90 billion; and allowing bond finance deficit bond financing for the authority up to $10 billion.

“That’s good news for riders in tough times,” said Lisa Daglian, the executive director of the watchdog Permanent Citizens Advisory Committee to the MTA.

Congestion pricing was to raise an expected $15 billion for the MTA through bonding. It is still a variable, though, given quibbles with the federal government over environmental studies that preceded the pandemic.

The congestion pricing bill also authorized funds for the MTA through Internet sales and mansion taxes.

“The state needs to maintain the MTA and make sure they don’t default on their debt,” said Howard Cure, director of municipal bond research for Evercore Wealth Management. “They need access to the capital markets.

“We all know the capital needs of the MTA. Some of their equipment is 100 years old and made by companies no longer in existence.”

According to data on the Municipal Securities Rulemaking Board's EMMA website, a block of 2016D transportation revenue refunding bonds maturing in 2037 that originally priced at 123.233 cents on the dollar and a 2.45% yield sold to a customer Thursday night at a price of 106.685 cents and a 5.059% yield.

While bond analysts are normally wary of capital-to-operating shifts, such a move in this instance is understandable, according to Cure, given the MTA's plight.

Still, “the lockbox has been picked,” Daglian said.

"Unfortunately, the COVID-19 crisis is claiming the MTA lockbox as a victim, at least for the immediate future,” she added. “The long-fought-for lockbox was designed to keep congestion pricing funds apart from other funds so that wouldn’t get sideswiped for other uses. Obviously, we’re in tragically disruptive times and recognize the need to rob capital Peter to pay operating Paul but hate this as precedent.”

Also Thursday, the MTA and the city announced an agreement site-specific value capture strategy to jump-start development of 341-347 Madison Avenue, the site of the authority’s former headquarters near Grand Central Terminal in East Midtown.

Real estate taxes and other revenue generated from the future ground lease for the redevelopment of the property could generate more than $1 billion for the MTA capital program throughout the ground lease, the parties said in a joint statement.

According to officials, the East Midtown agreement provides a creative way for the city to fulfill its obligation to provide $600 million from alternative non-tax-levy revenue sources as part of its $2.66 billion contribution to the MTA’s 2015-2019 capital program. It also demonstrates the MTA’s commitment to maximizing the value of its real estate assets.

Janno Lieber, president of MTA Construction & Development, the project will include a new entrance on Madison Avenue with direct connection to Grand Central and the new Long Island Rail Road terminal, expected to open in 2022.

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