LaGuardia’s $2.5B Deal: Project’s Complexity Cited as Construction, Credit Risk

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One of the largest municipal market deals of 2016 will help the $4 billion overhaul of New York City's LaGuardia Airport take flight.

Conduit issuer New York Transportation Development Corp. is slated to sell $2.5 billion in special facilities bonds, series 2016A and 2016B on behalf of developer LaGuardia Gateway Partners for the massive project.

The Port Authority of New York and New Jersey, which operates the 77-year old airport in Queens, recently approved a lease with LGP to build and operate a new state-of-the-art Terminal B, a new central hall, and a connecting concourse.

The makeover is expected to be constructed in phases over a 74-month period with LGP managing operations in a lease term that runs through December 2050.

Citi, Wells Fargo and Barclays are lead managers for the sale, which features $2.35 billion in tax-exempt bonds and $150 million in taxable securities.

Ramirez & Co and Siebert Brandford Shank & Co. LLC are co-managers on the deal, which may also include an additional $500 million in taxable bonds, according to the preliminary statement.

Squire Patton Boggs and D. Seaton & Associates are bond counsel firms for the sale that, according to preliminary statement numbers, would be the muni market's second-largest of 2016, behind only California's $2.9 billion general obligation bond issue in March. LGP referred questions about the sale to the Port Authority, which declined to comment.

The deal is scheduled to price on May 17 and close June 1.

Moody's Investors Service assigned the deal a provisional Baa3 rating and Fitch Ratings assigned its BBB rating. Both rating agencies noted in pre-sale reports that the project's complexity creates construction risks.

"The construction project is among the most complex Moody's has rated on a stand-alone basis due to poor geologic conditions, environmental contamination, tight space constraints, site access issues, potential coordination with another concurrently constructed private terminal and keeping the facility open and operating at current levels," said Moody's analyst Earl Heffintrayer in a May 2 report.

"It's a complicated project in a very tight space and you still have to operate a major airport while construction is going on," said Howard Cure, director of municipal bond research for Evercore Wealth Management. "There is a lot to coordinate."

Both Moody's and Fitch emphasized in their pre-sale reports that potential construction challenges should be largely mitigated by a design-build joint venture with LGP and its project sponsors, Vantage Airport Group, Skanska Infrastructure Development and Meridiam Infrastructure North America.

Skanska has extensive experience in the New York City market having previously worked with the Port Authority on the roughly $1 billion World Trade Center Hub and a $1.2 billion Air Train project at John F. Kennedy International Airport.

"Required construction work is complex primarily due to construction taking place concurrent with full airport operations in the existing Terminal B," said Fitch analyst Casey Cathcart during a May 4 conference call. "However, this is within the experience of LGP's design-build team members."

Cure said the overall undertaking should be positive given LaGuardia's current limitations, but he added that the overhaul would make far more of a difference if it included more expanded runways that allowed for additional daily flights. He credited the project for being built with a design-build model saying this approach should "help keep costs down."

Fitch noted that existing airline agreements have been extended through the construction period, but there is uncertainty regarding cost recovery after the project is completed. Airline payments are expected to comprise around 80% of pledged revenues with the remainder deriving from commercial concessions.

Fitch analyst Emma Griffith downplayed the concession component during the conference call.

"While I think there is a lot of opportunity for concession revenue growth given what you have today at LaGuardia versus what this new project will offer, it's not seen as the big driver of revenue growth going forward," said Griffith.

Griffith notes Terminal B commercial revenue is expected to benefit from a 135% increase of commercial space in the new facility compared to the current building. LGP plans to place retail and food beverage businesses "in optimal locations" beyond security checkpoints and is expecting a 3% annual increase in non-aeronautical revenues upon completion, according to Griffith. She said Fitch believes aeronautical revenues alone are sufficient to cover debt service obligations and meet operating costs.

Under the public-private partnership arrangement, LGP will construct new improvements to the airport that are funded by the Port Authority, which has operated LaGuardia under a lease with the City of New York since 1947. The Port Authority, which also operates John F. Kennedy International Airport in Queens and Newark Liberty Airport in New Jersey, is responsible under the lease agreement for making payments to LGP for operation and maintenance of the Central Hall portion of the project.

LGP expects to derive revenues to pay its operating expenses and loan obligations for the bonds primarily from concession revenue and airline payments, according to the preliminary statement. Other revenues from flight landing fees and airport parking lots are not available to the borrower and not pledged toward the payment of the bonds.

The existing Terminal B at LaGuardia opened in 1964 with a design capacity of 8 million annual air passengers and served roughly 14.3 million passengers in 2015, according to Fitch.

Terminal B passenger traffic is expected to increase from 7.2 million in 2016 to 9.9 million in 2050, according to investor roadshow materials.

Nicole Gelinas, a senior fellow at the Manhattan Institute for Policy Research, said if the airline industry remains stable it should bode well for the LaGuardia deal. She said while there are unknowns about how successful the retail component of the overhaul will be that the overall project will likely be executed on schedule because of how large the stakes are.

"I feel confident that they can build it reasonably on time and on budget because the concessioner does not want to screw up such an important project," said Gelinas. "That would be the major credit risk, that they don't finish on time."

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