NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the underlying 'A+' rating on the Port of Oakland's (the port) $952 million outstanding senior consolidated revenue bonds outstanding. In addition, Fitch has downgraded the port's approximately $514 million outstanding intermediate lien revenue bonds to 'A-' from 'A'. The Rating Outlook on all bonds is Stable.
RATING RATIONALE:
--The downgrade on the port's intermediate lien reflects the significant dilution in debt service coverage ratios at the subordinate lien level, resulting in debt service coverage levels which are below the port's historical levels as well as the port's internal goal of 1.3 times (x) on an all-in basis. As a result of the port's tighter financial profile coming out of the downturn, debt service coverage ratios on all-in basis have been steadily trending downward, sliding from a high of 1.68x in 2007 to 1.42x in fiscal 2010. The port is projecting near-term decreases in all-in coverage, forecasting a 1.27x all-in coverage in fiscal 2011 and 1.33x in fiscal 2013. Fitch believes coverage on the intermediate lien will be constrained by the port's rising intermediate debt service payments, which continue to escalate through fiscal 2013, weakening the intermediate lien bondholder's level of protection. Fitch views the port's aviation revenue estimates in the next two years as somewhat optimistic since the aviation component is an area where weakness still exists. The port is projecting this revenue segment will recover faster than historical growth rates, projecting approximately 7% in fiscal 2011-2013. However, a portion of this larger increase will be driven by non-airline revenues related to executed cargo contracts. Should aviation revenues not rebound as strongly as budgeted, the intermediate lien debt service coverages on an all-in basis could face further downward pressure due to the peaking of debt service.
The 'A+' and 'A-' ratings on the senior and intermediate liens reflect the port's revenue diversity, its favorable geographic location serving a large economic area with a high percentage of O&D passengers, the port's proximity to intermodal access and trade with the Pacific Rim, and a manageable capital plan with little additional debt envisioned in the near term. Credit concerns include the port's rising debt service profile through fiscal 2020, continuing the pressure on financial flexibility, the highly competitive nature of the region's airport environment, which has intensified in recent years due to sizeable new low cost carrier offerings out of San Francisco Airport, and the maritime division's concentration with the Pacific Rim for its trade.
KEY RATING DRIVERS:
--The port's ability to manage near-to-medium term profitability given the steep decreases that occurred in passenger traffic levels.
--Maintenance of the current traffic base as well as ongoing commitment from the port's anchor airline carrier, Southwest Airlines. Southwest currently retains approximately 70% 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 revision to Outlook Stable from Negative reflects the slow recovery in the port's main business segments such as aviation and maritime divisions, the port's ability to adjust prior capital plans to better match stressed revenue trends, and the successful containment of operating and maintenance expenses Fitch believes that although the port's aviation traffic is recovering at a slower pace than national trends, sizeable enplanement contraction similar to the levels experienced in 2009, are unlikely. Traffic on a calendar basis recovered marginally in 2010, growing by approximately 0.4%. In addition, the port's ability to manage its operating cost profile, scale down its capital plan and eliminate any near-term debt issuances, and successful implementation of its P3 program are captured in the Outlook revision back to Stable. Under the 50-year concession, which commenced in January 2010, the concessionaire, a joint venture of Ports America Outer Harbor Terminal LLC, agreed to finance infrastructure improvements as well as pay a minimum $19.5 million annual rent. With the upfront proceeds, the port used approximately $60 million in an up-front payment to defease outstanding senior lien debt. As a result the port's senior lien debt service declined by approximately $3.0 million, helping to keep coverage levels on the senior lien consistent with historical levels. In fiscal 2010, the port generated senior lien coverage of 1.76x and all-in coverage of 1.42x. The port indicates that for the first six months of fiscal 2011, net operating income is ahead of budget.
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. Passenger volumes are still well below the 2007 peak of 7.27 million, and a strong traffic recovery is not likely given the fierce competition for passengers in the bay area. Year to date enplanements are flat and are tracking with the port's estimates for fiscal 2011. Going forward, the port projects enplanements will grow by 2% in fiscal year 2012 (FY2012) followed by a 2.25% increase in 2013. Despite the higher than average enplanement declines, cost per enplanement (CPE) was still a competitive $9.64 in fiscal 2010, rising slightly from $8.77 in fiscal 2009. In addition, the port expects its business operations to remain stable and largely unaffected by the current events in Japan.
In calendar year 2010, the port began to see a reversal in the downward trends in the maritime division, with volume up year over year by approximately 13.9%. Total TEUs increased significantly in calendar year 2010 to 2.3 million, near 2007 peak levels, after experiencing consecutive years of declines of 6.5% and 8.4% in FY 2008 and 2009, respectively. The authority is expecting some of this recent growth to taper down as the volume of trade with the Pacific Rim slows and retail inventories are restored. Maritime revenue for the first six months of FY2011 is 12.00% higher than budgeted and tenants are performing above their respective minimum annual guarantees.
Debt service coverage has trended down due to the rising debt service profile coupled with the reductions in the port's two main business operations. All-in coverage slipped in fiscal 2009 to 1.38x and has stayed in this range, reporting all-in coverage of 1.42x in fiscal 2010. In fiscal 2010, senior lien coverage came down from 2.02x in fiscal 2009 to 1.76x as growth in annual debt service obligations outpaced net operating income. All in coverage without the use of rolling coverge, is expected to trend down to the 1.25- 1.30x range, which Fitch views as a risk. The authority has an internal policy goal of maintaining a 1.3x port-wide coverage ratio and is projecting to be below this goal through fiscal 2011, despite aggressive cost reductions strategies executed in fiscal 2009 and 2010. In light of the highly competitive service area and elevated debt service obligations, increases in the port's main businesses divisions 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 151 daily nonstop flights to 26 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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.