Fitch Ratings has affirmed the 'A+' rating on approximately $40.7 million in outstanding San Diego Unified Port District revenue bonds.
The Outlook Revision to Stable from Negative reflects improved revenue performance amid mild improvement in the economy. The rating further reflects the District's strong liquidity position, low leverage levels as measured through net debt to cash flow available for debt service (-0.3x at fiscal 2011), and an expectation of limited capital needs that will be funded through the District's excess cash and capital reserves.
KEY RATING DRIVERS:
Mix of Maritime and Real Estate Assets: The port's assets include real estate holdings in prime tourism/business areas of the city and two niche marine terminals primarily focused on break bulk cargo services. Growth in automobile and specialized equipment handling has been noted.
Diverse Sources of Revenue: The maritime and real estate revenue base is supported by long-term fixed rents and concession revenues. In fiscal 2011, fixed rents totaled 28% of operating revenue while concession revenues accounted for about 34% of operating revenues. Revenue performance declined considerably during the recent recession, though moderate growth is forecast going forward.
Sound Debt Structure: The District's debt is entirely fixed rate with stable annual debt service requirements. Legal provisions include a 1.25x rate covenant and additional bonds require 1.25x coverage of projected maximum annual debt service. A cash funded debt service reserve fund is maintained.
Strong Balance Sheet Offsets Overall Constrained Financial Flexibility: Leverage metrics (net debt to cash flow available for debt service (CFADS)) are low as a result of the strong cash position which also benefits liquidity. Senior debt service coverage levels are sound though all-in debt service coverage is narrower.
Limited Future Capital Needs: Capital needs in the near term are limited and expected to be funded through excess cash and capital reserves. The District's capital plan spanning fiscal years 2014 through 2018 requires a modest $6.17 million in District funds.
WHAT COULD TRIGGER A RATING ACTION:
--A sustained inability to grow the port's revenue base commensurate with operating cost growth, resulting in reduced debt service coverage levels.
--Significant deterioration in liquidity, as evidenced by an increasing net debt to CFADS.
The bonds are secured by a pledge of net revenues.
Fiscal 2011 operating revenues grew 5.2% over fiscal 2010 levels, reflecting significant growth in the District's real estate related revenues which offset weakness in the maritime sector. One time revenues generated from the sale of fixed assets also contributed to the positive performance, and when removed from operating revenues, growth was 2.7%. The District has been focused in recent years on reducing operating expenditures, implementing in December 2010 a reorganization designed to reduce layers of management, create efficiencies and position the organization for growth and as a result, fiscal 2011 saw a 1.6% decrease in operating expenses.
Per Fitch's calculations, fiscal 2011 net revenues provided senior debt service coverage of 5.5x. Additionally, coverage of senior bonds and the subordinated promissory note with an outstanding balance of $42.7 million to the San Diego County Regional Airport Authority (the Authority) totaled 2.3x. Although the promissory note is subordinated, the legal agreement allows the Authority to offset debt service from Authority lease payments due to the District in the event the District has missed a note payment. Debt service on the promissory note was about $3.7 million in fiscal year 2011 and the related lease payment is approximately $9.75 million. The District is also obligated to make support payments to the city of San Diego of $4.5 million annually through 2014. This payment may be deferred but would accrue interest at a rate of 10 percent per annum.
The 2012 adjusted budget projected a relatively flat revenue performance to fiscal 2011, bolstered in part through one-time revenues related to insurance policy settlements. Expenditures were forecast to rise by nearly 10%. Through 11 months of the fiscal year, the District reports that revenues are slightly above projections, though expenses are over $7 million below budgeted levels. As a result, debt service coverage ratios are expected to decline somewhat, with Fitch calculations showing fiscal 2012 revenues, excluding the insurance policy settlement proceeds, providing 2.7x senior coverage and 1.6x coverage of senior bonds and subordinate notes.
The fiscal 2013 budget assumes 5.8% revenue growth relative to the adjusted fiscal 2012 budget and budgeted expenditures as compared to the adjusted budget were projected to decline, though slight growth relative to fiscal 2012 is expected to be shown once fiscal 2012 expenses are finalized at below budget levels. Projected fiscal 2013 coverage levels are expected to remain near fiscal 2012 levels with the support of a more limited insurance policy settlement expectation.
Port cargo activity grew 4.2% during fiscal 2012 following a decline of 1.3% in fiscal 2011. Development efforts on the maritime side have started to payoff in the form of new business opportunities in the alternative energy space as well as growth in automobile imports particularly from Korea.
The District was created in 1962 by the California State legislature pursuant to the San Diego Unified Port District Act to manage the San Diego Bay and surrounding waterfront land, operate the airport, and administer the public tidelands through property management. The District's jurisdiction covers the five member cities of San Diego, Chula Vista, Coronado, Imperial Beach and National City. In January 2003, Assembly Bill 93 and Senate Bill 1896 transferred the airport operations to the San Diego County Regional Airport Authority. The district is governed by a seven-member board of commissioners appointed by the city councils of the five member cities.
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:
--'Rating Criteria for Ports' (Sep. 19, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Ports
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