Fitch Ratings assigns an 'A+' rating to the Port of Oakland, CA's (the port) approximately $350 million senior lien revenue refunding bonds series 2011 O (AMT) and affirms the 'A+' rating on $834 million senior lien consolidated revenue bonds outstanding. In addition, Fitch affirms the 'A-' rating on the port's approximately $480 million intermediate lien revenue bonds outstanding. The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
--A favorable geographic location for the maritime and aviation divisions that serve a large economic area with a high percentage of O&D passengers;
--Competitive pressure on the aviation front, particularly from San Francisco airport and high dependence on the Pacific Rim for maritime trade;
--A solid and diverse revenue base as evidenced by a residual agreement and competitive cost per enplaned passenger (CPE) of $9.64 in fiscal 2010 at Oakland International Airport and long-term contracts with robust minimum annual guarantees at the Oakland seaport;
--All fixed rate debt with no refinancing risk, moderate leverage of 8.5x net debt to cash flow available for debt service, and a rising debt service profile through fiscal 2020, which will continue to pressure debt service coverage and other financial metrics;
--Manageable capital plan through fiscal 2018, with only $130 million in additional senior debt currently contemplated.
WHAT COULD TRIGGER A RATING ACTION:
--The port's ability to manage near-to-medium term profitability given the steep decreases that occurred in passenger traffic levels and rising debt service obligations;
--Maintenance of the current traffic base as well as ongoing commitment from the port's anchor airline carrier, Southwest Airlines. Southwest currently retains approximately 73% market share but operates under short-term 30 day agreements;
--Management of the port's cost profile and capital plan to allow net operating income to grow.
SECURITY:
The port's senior consolidated revenue bonds are secured by a gross revenue pledge of all port revenues, including the aviation (Oakland International Airport), maritime (Oakland Seaport), and commercial real estate divisions. The intermediate lien revenue bonds are secured by a gross revenue pledge subordinate to the senior lien.
CREDIT SUMMARY:
The port's main business segments such as aviation and maritime divisions have started to recover after experiencing steep declines during the recession. Enplanements showed signs of stabilization in calendar year 2010 increasing by a nominal .39% to 4.78 million after a significant decline of 27% in fiscal year 2009. However, year-to-date enplanements are down 1.9% when compared to the previous year. The airport's feasibility consultants are projecting no growth in enplanements through fiscal 2012 and 2.4% growth thereafter, which results in a peak CPE of $11.11 in fiscal 2017. Despite the higher than average enplanement declines, CPE was still a competitive $9.64 in fiscal 2010, rising slightly from $8.77 in fiscal 2009. Passenger volumes are still well below the 2007 peak of 7.27 million, and in Fitch's view a strong traffic recovery is not likely given the fierce competition for passengers in the San Francisco bay area.
In calendar year 2010, the seaport began to see a reversal in the downward trend in twenty foot equivalent units (TEUs), increasing by 13.9% to 2.3 million, near 2007 peak levels. Through the end of April, TEU volumes are 1.9% ahead of the port's fiscal 2011 budget and are tracking 5.3% higher over the same period in 2010. The port's feasibility consultants are projecting container volumes will grow by approximately 4.1% from fiscal 2011 through fiscal 2014. On the longer-term, (fiscal years 2011 - 2018), the port is projecting a 3.7% growth rate. Fitch notes the port's strong minimum annual guarantee agreements (MAGs) and other fixed lease payments, which comprise approximately 81% of the seaport's revenue base and are long-term in nature.
On March 18th, 2011, Fitch affirmed the port's underlying senior lien bonds at 'A+' and downgraded the port's underlying intermediate lien bonds to 'A-' from 'A'. The downgrade on the port's intermediate lien reflected the sizeable leverage at this lien level and the resulting significant dilution in debt service coverage ratios on an all-in basis. Debt service coverage levels slipped well below the port's historical levels and are budgeted to fall under the port's internal goal of 1.30 times (x) on an all-in basis in fiscal 2011. As the port's financial flexibility narrowed due to recessionary pressures, debt service coverage ratios on all-in basis decreased from a high of 1.68x in 2007 to 1.42x in fiscal 2010. In fiscal 2011, the port budgeted an all-in coverage of 1.28x and senior lien coverage of 2.03x. Through the forecast period, senior lien debt service coverage levels are projected to range from 2.03x in fiscal 2011 to 2.66x in fiscal 2018. On an all-in basis, debt service coverage figures are estimated to range from a low 1.28x in fiscal 2011 to 1.44x in fiscal 2018. The projected debt service coverage ratios incorporate an additional $130 million in senior lien debt in fiscal 2013 to refund then-outstanding commercial paper. In light of the highly competitive service area and elevated debt service obligations, increases in the port's main businesses segments may be needed to avoid further erosion in coverage levels.
The port oversees the Oakland seaport, Oakland International Airport and 20 miles of waterfront. The Oakland seaport is the third busiest container port on the U.S. West Coast. Oakland International Airport offers 134 daily nonstop flights to 31 destinations; and the port's real estate includes commercial developments such as Jack London Square, as well as hundreds of acres of public parks and conservation areas. The port was established in 1927 and is an independent department of the City of Oakland.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2010);
--'Rating Criteria for Airports' (Nov. 29, 2010).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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