NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'A' rating of approximately $36 million in Port Commission of the City and County of San Francisco (the port) revenue bonds, series 2010A and 2010B (the bonds). In addition, the port has approximately $3 million in outstanding California Department of Boating and Waterways loans, on a subordinated basis. The Rating Outlook is Stable.
Rating Rationale:
The 'A' rating reflects:
--The port's valuable real estate assets that serve as a regional, national and international destination. Port properties have maintained relatively strong occupancy rates despite the recent economic downturn;
--The diversity of revenue generated from real estate, parking, and maritime assets;
--The port's stable financial position and liquidity levels that are supported by non-cancellable operating leases and minimum annual guarantees providing a base level of revenue stability (around 40% of operating revenues);
--Manageable debt levels (4.0 times [x] debt/ cash flow available for debt service) with expected coverage around 2.0x, consistent with previous debt issuances. The port has an internal policy to maintain 1.75x coverage on debt going forward, and management intends to manage coverage to 2.0x or higher.
Credit concerns include:
--The port's aging infrastructure and overdue maintenance requirements that result in a heavy capital spending program over the next 10 years with a majority of plan financing not yet identified;
--Medium-term revenue losses and capital plan deferrals due to San Francisco's hosting of the America's Cup in 2013; however, these losses are expected to be made up by the city pursuant to a pending Memorandum of Understanding (MOU). The long-term impact to the port is unclear;
--The competitive nature of port revenue sources from both real estate and maritime activity;
--The port's exposure to cyclical variations in both the San Francisco real estate market and discretionary tourism spending.
Key Rating Drivers:
--Management of the capital program, including refurbishment of infrastructure, handling of overdue deferred maintenance, and the port's ability to secure funding for the unfunded portions of its capital program.
--Impacts of the America's Cup on port revenues and activity level, and the ability of the city to help cover revenue losses, added expenses, and related capital requirements for the port.
--Health of the San Francisco economy, including the real estate market and discretionary tourism spending levels.
Security:
The bonds are special, limited obligations of the Port Commission payable solely from net revenue and from amounts on deposit in certain funds and accounts held under the Indenture.
Credit Summary:
San Francisco has been selected to host the 34th annual America's Cup in 2013. The event features multiple weeks of sailing races, as well as several months of build-up to the event with teams training in the area. The city expects the event to generate $1.4 billion in economic benefit to the area, $19.5 million in tax revenue, and create 9,000 jobs. The event authority will complete approximately $55 million in infrastructure repairs and improvements for the event, involving several piers and use of certain port facilities rent-free for race activities. The port will incur several one-time costs to prepare the facilities, and will lose rent revenues associated with displaced tenants from properties used for the event. The city and port are currently in the process of approving an MOU which will serve to partially reimburse the port for revenues lost as a result of the event (estimated at $6.7 million over a three-year period), reduce projected shortfalls in its cruise terminal project (estimated $21 million); and fund other related costs incurred by the port (estimated at $2.6 million). With these protections in place, the event should be credit neutral; however, should the event authority or city be unable to reimburse these added costs, the port's credit quality may be affected.
The port's current 10-year capital plan through 2021 totals $2.16 billion, up $60 million from last year (due to inclusion of a 1.5% annual cost escalation). Management has identified an estimated $744 million to fund the program, up from $650 million a year ago. Fitch expects that the port will look to create partnerships and leverage various funding and financing options to address the backlog of deferred maintenance and the projected replacement costs in the plan. While the overall plan size is similar to last year, hosting of the America's Cup in 2013 calls for some modifications. The Cup calls for use of eight piers and the two-acre Seawall Lot 330 for event-related activities starting in 2012. This will require substantial improvements to Port property by 2013 and alters the Port's long-term debt strategy. In addition, due to revenue reductions from the America's Cup, near-term borrowing expectations through 2015 have been reduced from $60 million to $40 million. However, over the life of the plan, inability of the port to secure funding for necessary maintenance and refurbishment work going forward may negatively impact credit quality, especially if leverage is used to fill the gap. The port will need to balance the timing and quantum of expected future borrowing with its ability to meet increased debt service requirements.
Port operating revenues have increased every year for the past 15 years, including through the recent downturn. Port operating revenues for fiscal year 2010 were $66.6 million, 0.7% above the previous year; 2009 was up 2.5% vs. 2008. The port derived approximately 75% of its total fiscal 2010 operating revenue from a diverse portfolio of over 460 leases. Approximately 33% of revenue is derived from existing leases with terms extending beyond 20 years. Leases and minimum annual guarantees provide a degree of revenue stability to the port, with $45 million of revenues in 2010 coming from minimum guarantees under non-cancellable operating leases. Outpacing revenue growth, total operating and maintenance expenses reached $58.7 million in fiscal 2010, up 2.1% over 2009 but with lower growth than the previous year. The balance sheet has strengthened in recent years, with unrestricted cash balances reaching $91.7 million in 2010; this compares to $85.1 million in fiscal 2009, and represents 570 days cash on hand. Looking forward, combined debt service coverage on both the 2010 bonds and projected issuances of a further $40 million ($15 million in 2012 and $25 million in 2014) is expected to remain at or above 2.0x, consistent with coverage levels historically. While the legal covenant is 1.3x coverage, the port has an internal policy to maintain 1.75x coverage, and management intends to manage coverage to 2.0x or higher.
The port's unique mix of real estate assets, which serve as a regional, national and international destination, is a strength for the credit. In addition to the port's major tourist attractions, including Pier 39, Fisherman's Wharf, the Ferry building, and AT&T Park (Giants ballpark), the port also owns significant office and commercial space close to the financial district. Commercial and industrial leasing accounted for 60% of operating revenues in fiscal 2010, and has held steady at about 60% over the past several years. Port real estate assets have maintained relatively high occupancy rates despite the downturn, with a blended 8.3% vacancy rate for offices and shed properties in fiscal 2010 (compares favorably to city-wide vacancy rate of 17% for commercial space). However, continued revenue generation by these assets, many of which were constructed 100 years ago, is dependent upon maintenance of the facilities in order to keep them functional, market competitive, and code compliant. Failure to address deferred maintenance requirements will negatively impact the port's revenue base and underlying credit quality.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
'Rating Criteria for Infrastructure and Project Finance', dated 16 Aug. 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
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