Port Authority eyes Fed lending program, but analysts doubt they'll use it

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The Port Authority of New York and New Jersey is exploring all available financing options, including the Federal Reserve’s newly launched bonding initiative to offset steep COVID-19-related financial losses.

The bi-state agency announced last week its board of commisioners has authorized management to apply for the Fed’s Municipal Liquidity Facility, which buys securities of eligible state and local government entities to help them manage cash flow stresses caused by the COVID-19 pandemic. The MLF, which was created under the CARES Act, originally was limited to states and large municipalities, but the final version passed by Congress was amended making multi-state agencies eligible.

"The Municipal Liquidity Facility is an important and critically valuable short-term backup financial resource as the agency manages its cash flow during this crisis,” says Port Authority Executive Director Rick Cotton.

The Port Authority would be eligible for $1.1 billion of borrowing under the central bank’s program. Port Authority spokeswoman Lindsay Kryzak said the agency has not decided if it will apply, when it would or how much it would borrow under MLF, just one of multiple financing options the Port Authority is considering.

The transportation agency is projecting $3 billion of revenue losses over the next two years stemming from major traffic declines at Port Authority facilities in the past two months.

“The Municipal Liquidity Facility is an important and critically valuable short-term backup financial resource as the agency manages its cash flow during this crisis,” Port Authority Executive Director Rick Cotton said in a statement. “We thank both states’ Congressional delegations for their hard work in supporting the Port Authority’s request to add multi-state agencies as eligible entities for Federal Reserve support through the Municipal Liquidity Facility.”

Government restrictions limiting travel throughout the region in an effort to confront the spread of COVID-19 have driven the Port Authority's revenue hole, according to Cotton. Traffic at the Port Authority airports has plunged 97% since the virus’s outbreak, with rail ridership on the PATH commuter line falling 95% compared to a year ago. Bridge and tunnel traffic dropped 40%.

Moody’s Investors Service, Fitch Ratings and S&P Global Ratings have all revised the Port Authority’s credit outlook to negative from stable since volume sank across all of its transportation assets. S&P and Fitch rate Port Authority bonds AA-minus while Moody’s rates the agency Aa3. The agency had $22.2 billion of outstanding consolidated bonds as of March 31, according to an April 14 disclosure to bondholders.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said that while the MLF provides the Port Authority with an extra financing tool, he does not see the program as beneficial for it and other high-rated entities because of the fees involved. He said the Port Authority would be better off pursuing private placements if it needs quick market access to address liquidity issues.

“It would be rather onerous for them,” Cure said of the MLF. “It doesn’t seem to make much sense.”

Fitch Ratings analyst Seth Lehman said he doesn't see the Port Authority ultimately moving forward with the MLF option, since the agency has other less expensive avenues for issuing debt, given its good credit ratings. It still makes sense to review the Fed program’s fees as part of the agency's due diligence procedures when determining its best bonding route, he said.

“We would expect management to explore all borrowing options and weighing the cost risks as part of their vetting process,” Lehman said.

The Port Authority received $450 million of Federal Aviation Administration grants for its airports under the CARES Act, which Cotton has said is crucial for maintaining its ongoing $37 billion, 10-year capital program. The capital plan, which runs through 2026, is funding large-scale redevelopment projects at the Port Authority's three major airports, LaGuardia, Kennedy and Newark Liberty.

Cotton wrote to New York and New Jersey’s congressional delegation on May 11 requesting additional federal funding to plug its large revenue gap. He noted during the Port Authority’s May 21 meeting that the CARES package did not include rail transit assistance grants that would be beneficial for PATH or cover “unprecedented revenue losses” the agency is facing from the virus-related closures

“A short-term loan through the Municipal Liquidity Facility would provide immediate liquidity relief, while direct funds through the next aid package are needed to enable the agency’s capital construction projects to provide vigorous support to a strong economic recovery,” Port Authority Chairman Kevin O’Toole said in a statement. “Federal assistance is key to moving this region out of crisis and into recovery.”

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