NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the Port of Oakland, CA's (the port) approximately $390 million senior lien revenue refunding bonds, 2012 series P, Q & R, and affirms the 'A+' rating on $798 million outstanding senior lien revenue bonds. In addition, Fitch has affirmed the 'A-' rating on the port's approximately $465 million outstanding intermediate lien revenue bonds. The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS
O&D Traffic Base with Exposure to Competition: A favorable geographic location for the maritime and aviation divisions that serve a large economic area. Concentration risk from Southwest's dominant presence is somewhat offset by Oakland International Airport's high origin and destination (O&D) traffic profile, at approximately 86% of passengers. Competitive pressure on the aviation front, particularly from San Francisco airport, and high dependence on the Pacific Rim for maritime trade provide some concern. Revenue Risk-Volume: Mid-range.
Diverse Revenue Base: The port benefits from revenue diversity, with 51% of operating revenues derived from maritime operations and 45% from aviation activity. The airport's costs are supported by residual rate-making methodology that resulted in competitive cost per enplaned passenger (CPE) of $10.02 in fiscal 2011 (fiscal year ends June 30). Long-term contracts with robust minimum annual guarantees at the Oakland seaport provide additional downside protection for revenues. Revenue Risk-Price: Mid-range.
Conservative Debt Structure: All port revenue bonds are fixed rate with no refinancing risk. All bond reserves are cash funded, except for approximately $36 million funded with a surety policy. Debt Structure: Stronger.
Elevated Leverage and Stable Revenue Trends: The port maintained adequate liquidity of $175 million or 431 days cash on hand and moderately high leverage of 7.4x (net debt to cash flow available for debt service) in fiscal 2011. All-in coverage improved to 1.47x in fiscal 2011. The current refunding is expected to level out the port's currently rising debt service profile through fiscal 2019. Debt Service Counterparty Risk: Mid-range.
Manageable Capital Plan with Possible Future Borrowing: The port's $638 million capital plan through fiscal 2017 is manageable, with $469 million dedicated to aviation related projects and $153 to maritime division projects. Approximately $144 million is expected to be funded with debt, while the balance will be funded with a combination of grants, passenger facility charge revenues and internal liquidity. Infrastructure Development Renewal: Mid-range.
WHAT COULD TRIGGER A RATING ACTION
--Maintenance of the current traffic base as well as ongoing commitment from the port's anchor airline carrier, Southwest Airlines;
--Additional leveraging absent continued stability in the port's revenue profile which could weaken financial flexibility and margins;
--Management of the port's cost profile and capital plan to allow net operating income to grow.
The port's senior 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.
The proceeds from the series 2012 issuance of an estimated $390 million in refunding bonds will be used to currently refund the ports outstanding 2002 series L, M and N revenue bonds. Net present value savings for the refunding are currently estimated at approximately $48 million or 10.4% of the refunded principal, resulting in reduced and level debt service requirements between fiscal 2014 and 2020 at approximately $100 million. The final maturity of the refunding bonds will be six months later than the refunded bonds and will mature in fiscal 2033. The port expects to maintain a fully funded debt service reserve fund.
The port's main business segments such as aviation and maritime divisions continued to recover after experiencing steep activity declines during the recession. On the aviation side, concentration risk remains a concern, with Southwest accounting for 74% of enplanements in fiscal 2011 and operating under short-term 30-day agreements. This risk is partially offset by the high share of O&D traffic (approximately 86% in fiscal 2011) using the airport. While fiscal 2011 enplanements were down 1.9% when compared to the previous year, fiscal 2012 preliminary results indicate a 2.9% growth in enplanements, reaching 4.8 million. CPE was still a competitive $10.02 in fiscal 2011, rising slightly from $9.36 in fiscal 2010. 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 2011, the seaport's cargo traffic, as measured in twenty foot equivalent units (TEUs), was essentially flat at 2.3 million (up 0.6%), and preliminary fiscal 2012 data indicates similar results. Fitch views favorably the port's strong minimum annual guarantee agreements (MAGs) and other fixed lease payments, which comprise approximately 77% of the maritime operating revenue base and are long-term in nature. Several of the port's major agreements at the seaport are scheduled to expire in 2017 or earlier.
Favorable financial performance has resulted in improved debt service coverage ratios in fiscal 2011 when compared to the prior year, with all-in coverage of 1.47x and senior lien coverage of 2.33x above fiscal 2010 levels of 1.42x and 1.76x, respectively. The port was able to achieve an increase in net revenue as a result of higher operating revenues (up 4.5% to $298 million) driven by increases in both aviation and maritime division and lower operating expenses before depreciation and amortization (down 1.3% to $148 million) resulting from management's cost control measures. On an all-in basis, the port estimates the debt service coverage at 1.50x in fiscal 2012, reflecting stronger aviation and maritime preliminary unaudited results.
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 Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Airports' (Nov. 29, 2011);
--'Rating Criteria for Ports' (Sept. 29, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Ports
Rating Criteria for Airports