Nov 14 - Fitch Ratings assigns an 'AAA' rating to the following New York
City Transitional Finance Authority (TFA) series 2013 future tax secured bonds:
--Approximately $100,000,000 tax-exempt subordinate fixed rate bonds subseries
--Approximately $100,000,000 of taxable subordinate qualified school
construction bonds subseries 2013C-2;
---Approximately $130,000,000 taxable subordinate fixed rate bonds subseries
--Approximately $307,545,000 of tax-exempt subordinate refunding bonds series D;
--Approximately $217,285,000 of tax-exempt subordinate refunding bonds series E.
Fitch affirms its ratings on the following outstanding TFA future tax-secured
--$2.7 billion senior bonds;
--$17.2 billion subordinate bonds;
--$1.3 billion recovery subordinate bonds.
The Rating Outlook is Stable.
The bonds are scheduled to sell competitively on Nov. 15. The series C bond
proceeds will be used to fund general and school capital projects. The series D
and E bond proceeds will redeem, at or prior to maturity, currently outstanding
future tax secured bonds.
Simultaneous with this offering TFA expects to issue approximately $248 million
in future tax secured subordinate variable rate bonds. Fitch will assign long-
and short-term ratings to the variable rate bonds with consideration of
liquidity support nearer to closing.
Fitch will withdraw its 'F1+' rating on TFA fiscal 1999 subseries 1999A-1 bonds
at the time of conversion of the bonds to a fixed-rate mode and termination of
the standby bond purchase agreement that had provided support for them. The
bonds will continue to be rated 'AAA' with a Stable Outlook.
The bonds are payable from revenues derived from a personal income tax (PIT) and
a sales and use tax imposed by the city, as authorized by the state. Payment of
the PIT and sales tax revenue to the TFA is not subject to city or state
Sales tax revenues will be available for the payment of bonds if PIT revenues
are projected to be insufficient to provide at least 150% of the maximum annual
debt service (MADS) on the TFA's outstanding bonds.
The senior bonds are subject to a $330 million limit on quarterly debt service.
Additional bonds may be issued as senior bonds if tax revenues for the 12
consecutive calendar months preceding authorization is at least 3x the amount of
annual senior debt service or $1.32 billion.
The subordinate additional bonds test (ABT) requires that tax revenues for the
most recent fiscal year are at least 3x the sum of $1.32 billion plus projected
subordinate debt service.
KEY RATING DRIVERS
STRONG LEGAL FRAMEWORK: The bankruptcy-remote, statutorily defined nature of the
issuer and a bond structure involving a first perfected security interest in the
PIT and sales tax revenues are key credit strengths. Payment of the PIT and
sales tax revenue to the TFA is not subject to city or state appropriation.
Statutory covenants prohibit action that would impair bondholders.
TAX RATE RISK LOW: The state can unilaterally modify or repeal tax law as it
relates to the PIT or sales tax and could risk default by exercising this right
in an extreme city fiscal crisis scenario. Fitch believes that the risk of this
STATUTORY CASH FLOW PROVISIONS: The PIT and sales tax are imposed by the city
pursuant to state statute and collected by the state. Revenues from the PIT (and
the sales tax, if required) flow directly from the state comptroller to the TFA
trustee and are not subject to state or city appropriation. The city receives
residual revenues only after advance quarterly funding of debt service.
ROBUST COVERAGE: Although senior bonds have a first claim on statutory revenues,
Fitch does not make a rating distinction between the liens due to the high
coverage levels. Debt service coverage on all future tax secured (FTS) bonds
from fiscal 2012 projected revenue was 8.4x. Even with sizable debt issuance
plans over the next four years, pro forma MADS coverage is expected to remain
SOLID ECONOMIC UNDERPINNINGS: Statutory revenues are derived from a broad
economic base with high income levels, benefiting from the city's unique role as
a national and international center for commerce and culture. The city's per
capita personal income is 130% of the national average.
DEPENDENCE ON WALL STREET: Financial activities account for about 12% of jobs
and 30% of earnings. Recession-related job declines have been well under
comparable national averages although weakness in financial services employment
is evident. The city's unemployment rate is above average and has recently been
trending higher, which may negatively affect future pledged revenue growth.
STRONG LEGAL FRAMEWORK PROTECTS BOND REPAYMENT
The 'AAA' rating is based on the very strong legal structure which insulates
bondholders from any operating risk of New York City (GO bonds rated 'AA' by
Fitch). The rating reflects the bankruptcy-remote, statutorily defined nature of
the issuer, the bond structure involving a first perfected security interest in
revenues that are not subject to appropriation, statutory covenants prohibiting
action that would impair bondholders, New York State as collection agent, and
the existence of two separately levied cash flow streams (the statutory
PIT and sales tax revenues are imposed by the city and collected by the state.
Revenues from the PIT as well as the sales tax, if required, flow directly from
the state comptroller to the TFA trustee, and are not subject to state or city
appropriation. The city receives residual revenues only after advance quarterly
funding of debt service.
The state is able to unilaterally modify or repeal tax law as it relates to the
PIT or sales tax and could risk default by exercising this right in an extreme
city fiscal crisis scenario; however, Fitch believes that the risk of this is
PLEDGED REVENUES EXHIBIT STABILITY DESPITE SOME VARIATION
The PIT consists of a base rate and a 14% surcharge. The PIT rate has changed
over time, most recently with a base rate increase in 2010. Both the base rate
increase and the 14% surcharge, originally imposed in 2002, are set to expire on
Jan. 1, 2015 unless extended with state approval. Failure to approve
continuation of both the current base rate and the 14% surcharge could result in
significant declines of pledged revenue.
TFA estimates indicate that annual FTS revenue at the minimum base rate with no
surcharge would decline by $5.7 billion by fiscal 2016. This level would still
provide about 3x coverage assuming additional debt is issued on the current
schedule and no change to the sales tax rate. Fitch believes this is an extreme
scenario given the importance of this source to the city's budget and the
consistent reauthorization of both a base rate above the minimum authorized and
the 14% surcharge.
The PIT comprised 58% of fiscal 2012 FTS revenue. Since fiscal 2003, both PIT
and sales tax revenue have declined in only one fiscal year. The significant
16.5% decline in fiscal 2009 was due in part to an adjustment for prior-year PIT
overpayments, and in part to the recession. Revenue increased in fiscal 2010 by
3.3%, aided by a base rate increase for high-income payers that became effective
in September 2010 for the full 2010 tax year. Fiscal 2011 included a full fiscal
year of collections at the higher rate, as well as the retroactive collection of
withholding tax payments for tax year 2010. As a result FTS revenue increased by
11.9%. Growth in fiscal 2012 was slightly below projections but sound at 4.7%.
STRONG COVERAGE EXPECTED EVEN WITH FUTURE DEBT ISSUANCE
Projected tax revenue for fiscal 2013 is 5.6% above fiscal 2012 levels. Debt
service coverage on all FTS bonds from fiscal 2012 projected revenue was 9.2x.
Combined with sizable debt issuance plans, projected coverage is expected to
remain high at a minimum of 6.7x through fiscal 2016 using the TFA's projected
annual pledged revenue growth of 4.5%, or 5.4x assuming no growth from audited
fiscal 2011 pledged revenue. While included in coverage figures, BAB and QSCB
subsidies are not pledged as security for the bonds. The reduction in subsidies
contemplated at the federal level would have a minimal impact on coverage.
These coverage projections assume the issuance of approximately $10.6 billion in
additional FTS bonds, in accordance with the city's capital improvement program
for fiscal years 2013-2016. Coverage is projected to well exceed the subordinate
ABT that requires that historical statutory revenues cover at least 3x the full
$1.32 billion maximum allowable senior debt service plus projected subordinate
ECONOMY INHERENTLY STRONG BUT NOT WITHOUT CHALLENGES
Fitch considers the city's unique economic profile, which hinges on its singular
identity as an international center for numerous industries and a major tourist
destination, to be a credit strength.
The city's tourism sector is performing exceptionally well. The city attracted
50.5 million visitors in 2011, above the record of 48.8 million visitors set in
2010. Another area of recent strength is the commercial real estate market.
According to Cushman and Wakefield, the city recorded 30.1 million square feet
of leasing activity in 2011, the highest volume since 2000, although the city
reports this activity has recently slowed. The city's economic profile also
benefits from its strong wealth, with per capita income 130% of the national
The city's economy (and operating budget) is strongly linked to the financial
sector, which accounts for approximately 12% of total employment but 31% of
earnings. According to the New York State Department of Labor (NYSDOL),
financial activities employment in the city declined 1.2% in the 12 months ended
October 2012, although total non-farm jobs rose 2.5%. The high-earning
securities and commodities component of the sector shed 3,100 jobs or 1.8%
during the 12-month period. Tightening financial reforms and regulation, reduced
bank profits, evidence of a shift in bonus and compensation practices away from
cash, uncertain economic recovery, and concerns in Europe are among several
factors that figure to weigh on financial sector prospects over the near to
Based on preliminary data, unemployment was up to 9.5% in September 2012 from
9.1% in September 2011. After some improvement during most of 2011, monthly
unemployment has consistently been up year-over-year in 2012. The increase
reflects growth in the labor force coupled with flat to slightly declining
employment. This is in contrast to the national trend, in which year-over-year
employment has increased, and unemployment decreased, in each month of 2012
Several of the sectors experiencing solid growth, including retail, health care
and social assistance, transportation, and leisure and hospitality, are
generally associated with lower wages. This may mute growth in pledged revenues.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria