Expected rents at a rising office tower at the World Trade Center site will back debt service on $1.31 billion of tax-exempt Liberty revenue bonds expected to price this week, but their real security comes from local governments.
The Port Authority of New York and New Jersey is the guarantor on the bonds being issued by the New York Liberty Development Corp. on behalf of an affiliate of developer Silverstein Properties Inc. to finance the construction of 4 World Trade Center. New York City’s credit is also potentially providing some security to the bonds.
Standard & Poor’s last week rated the bonds AA-minus with a stable outlook based on the blended credits of the Port Authority and New York City appropriation debt.
The borrower is 4 World Trade Center LLC, a subsidiary of Silverstein Properties.
Congress created the Liberty bond program following the terrorist attacks of Sept. 11, 2001, to help revitalize lower Manhattan with an $8 billion allocation of private-activity bonds. Last December, the LDC sold $2.59 billion of escrow bonds to meet a year-end deadline to sell Liberty bonds for redevelopment of the World Trade Center site.
The authorization for the Liberty bonds expired on Dec. 31, 2009. The developer was unable to use the bonds at the time because it was in the middle of arbitration with the Port Authority. The bulk of the bond proceeds were invested in Treasuries.
When the escrow bonds reached a mandatory tender date in October, they were re-escrowed because the developer wasn’t ready to use them. This process was repeated last month as the Port Authority finalized the conditions of its support of the project.
By selling them last year and putting the proceeds into escrow, the developer was able to preserve the tax-exempt status of the bonds.
Proceeds from this week’s transaction will be used to refund tendered escrow bonds as the developer taps the funds for construction. Next week the borrower plans to re-escrow the balance of outstanding escrow bonds until those funds are needed.
Silverstein may also use up to $200 million of recovery zone facility bonds for the project.
The developer plans to use the bond proceeds for construction costs on the 63-story office tower that is expected to open in 2013. The tower will have 1.8 million square feet of rentable office space on 56 floors and three floors of retail.
Goldman, Sachs & Co. is book-running senior manager on the deal set to be priced Wednesday or Thursday with no retail order period. Winston & Strawn LLP is bond counsel. The fixed-rate bonds will be offered with a 40-year bullet maturity and sinking-fund payments, according to the preliminary official statement.
Silverstein has spent between $300 million to $400 million of insurance proceeds for construction of the building which has reached the 10th floor, spokesman Bud Perrone said in an e-mail. The bond proceeds will be used to finance new expenditures, he said. The total price of the tower is expected to be $1.67 billion.
The Port Authority and the city are the only tenants lined up for the building so far. The agency agreed to lease 600,766 square feet in the building and New York City agreed to lease 581,642 square feet. The borrower and the authority can agree to terminate the city’s lease by Dec. 31, 2012, if another tenant is found.
A bond support agreement by the Port Authority under which it pays the amount needed to cover debt-service costs, subtracting the city’s rent, provides security for the bonds. If Silverstein is unable to rent all of the space taken up by the authority and city, the Port Authority will make up the difference. The city’s annual rent would be $32.86 million and increase over time according to a schedule. Assuming the city occupies the space, it will pay rent directly to the bond trustee.
Standard & Poor’s rates the Port Authority and New York City’s appropriation debt AA-minus. If either were to be downgraded, the 4 WTC bonds would be downgraded too. If the city does not end up leasing the space, the rating would be based solely on the authority’s credit.
“The Port Authority, through the landlord has the right to opt the city out,” said Standard & Poor’s analyst Karl Jacob. “If that happens, the Port Authority is the sole obligor on the bonds.”
The city’s lease, though an operating lease, is structured like a capital lease backing debt and appears in the city’s multi-year financial plan.
“We traditionally don’t rate pure operating leases, we rate capital leases subject to appropriation” Jacob said. “This deal was structured in such a way that the operating lease has capital-like points in it and so we’re treating this as we would a capital lease, and therefore because we’re doing that, the criteria says it’s very much tied to the city’s GO rating.”
If the city defaulted on its lease, its AA general obligation rating would be downgraded in accordance with appropriation-backed debt criteria, Jacob said. He said Standard & Poor’s was comfortable with the city’s long history of paying its operating leases.
Asked why the city was prepared to put its own credit on the line to lease space in the building, Andrew Brent, spokesman for Mayor Michael Bloomberg, said in an e-mail that “the city has a significant number of lease obligations, and we manage them carefully.”
The city’s lease is for 15 years with two 10-year renewal options. If the city did not renew, the credit would be solely based on the Port Authority’s credit.
The authority’s debt-support payment is an operating cost and functions as a senior lien in terms of cash flow because it’s paid before debt service on the agency’s outstanding consolidated bonds.
Standard & Poor’s analyst Joseph Pezzimenti said that with the tower’s construction well underway, the risk the project won’t be completed on time is minimal.
“Given where they are in the construction of this tower, the most complex part of it is behind them,” he said. “Now that they’ve gotten all of that below-grade construction done. It’s now really turned into a fairly standard, typical real estate development project where now they’re just adding floors.”
The authority operates four airports in the metropolitan region, commuter rail, bridges, tunnels, maritime ports, and a bus terminal in Manhattan, and it owns the World Trade Center site.
Matt Fabian, managing director at Municipal Market Advisors, said in an e-mail that the bonds should price like Port Authority debt.
“So long as it’s rated the same as the Port Authority, it should price and trade like that credit,” he said. “The market is in a race to the end of the year, so it’s unlikely that the pricing of any particular deal will have as much influence as it would were the market dead.”
Fitch Ratings expects to release a rating Monday. Moody’s Investors Service does not rate the deal. According to the preliminary official statement, the borrower submitted materials to Moody’s but selected Standard & Poor’s and Fitch because they were expected to provide the “two most favorable ratings.”
“Had the Tower 4 borrower selected Moody’s to rate the series 2010 Tower 4 bonds, there can be no assurance to the investors that Moody’s rating would not have been materially less favorable than the two ratings selected,” the POS said.
In April 2001, then-Gov. George Pataki announced that the authority was getting out of the real estate business and would lease the World Trade Center for 99 years to Silverstein and Westfield America Inc. The deal included an upfront payment and annual rental payments estimated at a net present value of $3.2 billion over the life of the lease.
“This is the largest real estate transaction in New York City history, and one of the largest privatizations ever of a government asset,” Pataki said in a statement at the time. “This agreement allows the private sector to bring its expertise to managing this landmark, and it frees Port Authority resources for improvements in airports, tunnels and bridges, and other parts of the region’s transportation network.”
The deal closed shortly before the Sept. 11 terrorist attacks that destroyed the buildings. Redevelopment of the site went more slowly than expected, but today two towers are rising and the construction of memorial reflecting ponds is on track to be finished by the 10-year anniversary of the attacks.