How JFK’s New Terminal One $9.5bn close was rewritten for today’s realities

The project, closed last month, was nearing financial close at the beginning of 2020. Then, the pandemic struck and the risk structure was overhauled.

Few projects embody the realities of today’s world more than New York’s JFK New Terminal One. Plans to revitalise JFK airport were announced in 2017. Five years later, four projects had sprung up – including New Terminal One, a new international terminal that will consolidate what is currently terminals 1, 2 and 3.

Originally led by the Carlyle Group, which held a 51 percent stake in the consortium, the project is now led by Ferrovial, which acquired 96 percent of that holding in February, leaving Carlyle’s Global Opportunities Fund with a 2 percent stake. That was the last major change before the $9.5 billion financial close last month, some $1.5 billion above its initial costs as a result of supply chain issues, increased labour costs, pandemic-related construction delays and interest rate volatility.

According to a source familiar with the closing, the deal was practically done heading into Q2 2020. However, the pandemic forced deal sponsors and the Port Authority to reassess the risk profile of the project.

Allan Marks, a partner at Milbank, the law firm that helped structure the deal as counsel to the banks, said: “The JFK expansion project basically went on hold from a financing standpoint due to the impact of covid on air traffic in the middle of 2020, and we resumed work in 2021. The Port Authority and project sponsors modified how the project contracts would work by phasing construction of the New Terminal One to match expected growth in traffic demand. There had to be retooling of all the contracts – with airlines, the construction and design-build contracts and, most importantly, the lease with the Port Authority of New York and New Jersey.”

A safe bet on hedging

One major change to the project financing came in the form of interest rate risk hedging. A source familiar with the project’s hedging strategy told Infrastructure Investor that “given the long-term nature of [the JFK NTO project] and its high degree of leverage, the interest rate risk was a central component to the plan of finance. The project wanted to retain flexibility in the long run on their takeout strategy”.

The source continued: “On these types of transactions, there’s usually a requirement to hedge interest rate exposure on the specific debt facility being offered in that moment – in this case, the five-year bank debt, which typically has a hedging requirement for 90 to 105 percent of debt outstanding. That’s a typical range. But looking at things more holistically, beyond the five-year point, [the organisers of the financial close] recognised that that 90 to 105 percent typical range probably didn’t make as much sense here, so [the project’s] hedging ratio skewed a little lower towards 75 percent for a more holistic, longer-term view, looking at the project in its entirety, to the maturity of the underlying lease.”

A phased approach

Another major change to the financial close was the pivot from a combined bank and tax-exempt deal to a fully underwritten bank deal. The financing contains $6.63 billion of bank debt, according to a statement from Chatham Financial, which helped advise on the hedging of the deal.

The project is being developed in a phased approach rather than all at once, reflecting concerns over whether air traffic volumes will recover in a consistent manner. Another source familiar with the project’s financing specified that there are traffic levels that will trigger the second phase of project construction. Thus, the financial close announced last month only applies to the first phase of the project. Financers think the project will be refinanced in the capital markets at certain periods of time, though the exact timing of that has not yet been worked out.

The source stressed that the driver of the financing was the choice in markets to fund the project. The pivot towards being more dependent on bank financing for a little bit longer was to weather interest rate volatility.

The source added that bank financing was always contemplated, but originally was structured in terms of different tenors. Within a month of closing, however, project financers decided to move everything to one, longer tenor at different terms. The bank market was supportive of that because there was recognition that shorter tenors in the bank financing would force the project to go to the capital markets for a takeout faster than financers may have wanted to at rates that the project would be locked into for longer periods of time.

The cost of innovation

The project is expected to complete construction in 2026. The lease granted by the Port Authority to the consortium will last until 2060.

Regarding the financial close, John Williams, another partner at Milbank who worked on the interest rate hedges, said: “By [implementing this new strategy], we accomplished two goals. One, we protected against [short-term] changes in rates we couldn’t control. We also aligned the planning horizon with the revenues and cashflows associated with the phased development of the project. So, we’ve got a long-lived asset and you have a long-term discounted cashflow financial model with assumptions on interest rates and financing terms, and we brought them into alignment in a way that reduces risk.”

However, the project’s financing agreement does have its downsides. With the new phased agreement, there will be fewer gates, initially, until passenger numbers return to those needed to kick-start phase 2. The financing agreement covers only those gates within the first phase.

Marks explained: “Under the final arrangements for the project, the first phase of New Terminal One will provide only replacement capacity for the existing Terminal 1 plus a dramatically updated main terminal building. Subsequent phases will expand the total number of new gates. And the addition [of more gates to the terminal] is phased so that the Port Authority is not building too big a terminal too quickly.”

In 2020, the project schedule assumed simultaneous construction of the headhouse, east concourse, and a portion of the west concourse. Now, the schedule has been adjusted for a phased approach over a seven-year period, Marks added. Phase A will begin this year and, assuming air traffic grows as planned, phase B1 should commence by 2026 with the demolition of the existing Terminal 1 and partial construction of the new west concourse. Phase B2 would commence thereafter and include the expansion of the west concourse.

Currently, it looks like passenger numbers are bouncing back well ahead of such conservatism. With other parts of the JFK redevelopment yet to reach financial close, could they face the same turbulence as New Terminal One?