Fitch Affirms Port of Oakland, CA's Sr Lien Revs, Upgrades Intermediate Lien; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the ratings for Port of Oakland, CA's (the port) approximately $667 million of outstanding senior lien revenue bonds at 'A+'. Fitch also upgraded the port's intermediate lien revenue bonds to 'A' from 'A-'. The Rating Outlook for both liens is Stable.

RATING RATIONALE

The ratings reflect diverse revenues from the port's aviation, maritime, and commercial real estate operations. The ratings are further supported by Oakland International Airport's (the airport) largely origin & destination (O&D) traffic base, cost-center residual airline and rate-making methodology and status as a medium-to-large hub in a competitive market space, coupled with long-term seaport contracts which provide stability for the port's revenue profile and debt service coverage ratio(DSCR). The port's capital improvement plan (CIP) is manageable with no need for additional long-term debt issuance in the next few years. Financial metrics are strong for the senior lien with a 2015 DSCR of 3.28x, and low leverage of 2.61x. The port's peers include the Massachusetts Port Authority (Massport) and the Port of Seattle, which are both consolidated port entities with senior liens rated 'AA'/Stable Outlook.

The upgrade of the intermediate bonds reflects the port's progressive deleveraging and historical debt service coverage that has exceeded Fitch's base case expectations. The intermediate bonds' lower rating compared to the senior bond rating reflects the lower coverage, higher leverage, and weaker covenant protections on the intermediate lien.

KEY RATING DRIVERS

Revenue Risk- Volume: Midrange

O&D Traffic Base Exposed to Competition: The port benefits from its sizeable enplanement base and maritime cargo operations within the large, economically diverse, and wealthy San Francisco Bay Area. These strengths are somewhat offset by high dependence on the Pacific Rim for maritime trade, significant competition from nearby airports, and the airport's high concentration in Southwest Airlines. Concentration concerns are somewhat mitigated by the airport's primarily O&D traffic profile.

Revenue Risk- Price: Stronger

Diverse, Stable Revenue Base: The port benefits from its diverse revenue base, with revenues split fairly evenly between its maritime and aviation divisions. Fitch views positively the revenue stability inherent to the airport's cost-center residual airline and rate-making methodology. Costs per enplanement (CPE) are roughly average for an airport of Oakland's size. Long-term contracts with robust minimum annual guarantees (MAGs) account for a substantial portion of maritime operating revenues, providing downside revenue protection.

Debt Structure: Stronger (senior); Midrange (intermediate)

Conservative Debt Structure: Both senior- and intermediate-lien port revenue bonds are fixed rate, fully amortizing with no refinancing risk; there is roughly $90 million of commercial paper outstanding, which Fitch does not consider to be a negative for the ratings. All bond reserves are cash funded, except for approximately $36 million funded with a surety policy.

Infrastructure Development/Renewal: Midrange

Manageable Capital Plan with Possible Future Borrowing: The port's five-year (2017-2021) $498 million CIP is manageable, with over 75% dedicated to aviation-related projects and about 24% for maritime division projects. Approximately $68.6 million is currently expected to be funded in future years with passenger facility charge (PFC)-backed debt, with the remainder funded by a combination of grants, pay-as-you-go PFCs, customer facility charges CFCs, and excess cash flow.

Stronger Senior Financial Metrics: The port's liquidity is solid with fiscal 2015 unrestricted cash of $199 million or 408 days cash on hand (DCOH), low senior leverage at 2.61x, and a robust senior DSCR of 3.28x. The all-in financial metrics are less robust, with leverage at a moderate to high 5.48x, and a materially lower DSCR of 1.63x.

Peers: The port's credit profile is weaker than its consolidated peers such as Massport ('AA'/Outlook Stable) and the Port of Seattle ('AA'/Outlook Stable). Massport's higher rating reflects its superior franchise strength as a very large international gateway. The Port of Seattle's higher rating reflects its much larger size and its strong competitive position within the Pacific Northwest, but has higher all-in leverage.

RATING SENSITIVITIES

Negative- Significant increases in the port's cost profile leading to a demonstrable loss of competitiveness, or notable and sustained declines in ongoing maritime and/or aviation sector revenues, affecting overall financial metrics and causing coverage to consistently fall well below 1.40x..

Positive- Fitch views the rating as unlikely to migrate higher due to the competitive nature of the service area and the expectation that operational and performance metrics are unlikely to improve materially.

SUMMARY OF CREDIT

The port consists of three business divisions: Aviation, Maritime and Commercial Real Estate (CRE). On the aviation side, enplanements saw strong growth, increasing 8.6% in 2015, and again by 8.1% in fiscal 2016. Management expects fiscal 2017 enplanement growth of 5.3%. Fitch believes that continued regional economic growth will drive enplanement growth at moderate levels moving forward. CPE decreased in fiscal 2015 to $10.48 from $11.22 a year prior due predominantly to higher enplanements. The Port expects CPE to remain in the $11 range, going forward. Fitch views the current CPE level as midrange for the airport's size and traffic profile.

Concentration risk remains a concern, with Southwest accounting for nearly 70% of enplanements in fiscal 2015 and 2016, though this risk is partially offset by the high share of O&D traffic (approximately 92% in 2015) using the airport. Fitch views the airport's cost-center residual airline and rate-making methodology positively, as it provides the airport with a strong cost recovery framework.

The seaport's cargo traffic, as measured by loaded 20-foot equivalent units (TEUs), fell 6.5% in fiscal 2015. The declines reflect expanding economic activity offset by labor unrest at the start of 2015. Additionally, the seaport lost a major tenant (Outer Harbor Terminal LLC) in early 2016, and expects seaport revenues to further decline 6.2% for fiscal 2016. Although the cargo declines will negatively impact total revenues, long-term contracts with MAGs make up a substantial 80% of maritime revenues, and over 99% of Outer Harbor's cargo was non-discretionary with cargo destined for local Northern California locations, thus providing a material financial mitigant. Management expects to fully recover by 2018. Based on the region's strong and expanding economy, Fitch views the projection as reasonable though susceptible to shifts in the seaport's competitive position among west coast ports, especially for discretionary cargo.

The port's consolidated financial performance was steady in fiscal 2015, with the all-in DSCR rising to 1.63x (3.28x for senior lien bonds) from 1.62x the year prior. Net revenues grew somewhat, with revenue growth of 4.2% outpacing expenditure growth of 5.5% (net of depreciation). Unaudited actual financial performance for fiscal 2016 showed deterioration in net revenues, mainly due to maritime revenue losses, and all-in DSCR is expected to fall to 1.54x (3.29x for senior lien bonds).

The port expects to issue an aggregate of $68.7 million in short-term, PFC-backed commercial paper for its five-year $498 million capital improvement program. Fitch views the size of the projected issuance as modest and does not anticipate a material effect on the port's credit quality.

Fitch's base case scenario through fiscal 2021 is based on budgetary information and projections provided by the port, which Fitch views as reasonable if slightly conservative. Under these assumptions, total revenues and expenditures grow at modest rates compared to their multi-year averages. Under this scenario the average all-in DSCR is 1.50x (senior coverage 3.18x), CPE remains in the $10 range, and all-in leverage peaks at 5.46x and declines thereafter.

Fitch's rating case assumes a hypothetical recessionary scenario with an enplanement decline of 7% in fiscal years 2017, followed by 2% annual recovery thereafter. The scenario also assumes slower revenue growth than the base case scenario and accelerated expenditure growth. Under these assumptions the all-in DSCR falls to an average of 1.36x through 2021, but is balanced by a midrange all-in leverage which peaks at 5.54x in fiscal 2017 and declines thereafter due to principal amortization. CPE jumps to $12.12 in 2019, but falls thereafter. Fitch views the coverage and leverage levels produced under the rating case as consistent with the current rating level.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)

https://www.fitchratings.com/site/re/877676

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/site/re/882594

Rating Criteria for Ports (pub. 20 Oct 2015)

https://www.fitchratings.com/site/re/872725

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013168

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013168

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings, Inc.
Primary Analyst
Scott Monroe
Director
1+415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Tanya Langman
Director
+1-212-908-0716
or
Committee Chairperson
Yvette Dennis
Senior Director
+1-212-908-0668
or
Medias Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Scott Monroe
Director
1+415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Tanya Langman
Director
+1-212-908-0716
or
Committee Chairperson
Yvette Dennis
Senior Director
+1-212-908-0668
or
Medias Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com