NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the port of Seattle, WA's (the port) $139 million intermediate lien revenue refunding bonds, series 2013.
In addition, Fitch has affirmed the following outstanding Port of Seattle bonds:
--$825.54 million in first lien revenue bonds at 'AA';
--$1.437 billion in intermediate lien revenue bonds at 'A+';
--$165.085 million in subordinate lien revenue bonds at 'A';
--$157.15 million in passenger facility charge (PFC) revenue bonds at 'A'.
The Rating Outlook is Stable for all bonds.
KEY RATING DRIVERS
--Strong Asset Base: The port operates Seattle-Tacoma International Airport (Sea-TAC), the primary regional air passenger service provider with a virtual monopoly in the Seattle area (73% origination and destination). Its seaport is one of the nation's largest container ports, although it operates in an extremely competitive west coast port environment with shippers continually making adjustments between the various ports to the gulf and east coast. Revenue Risk-Volume: Stronger.
--Diverse Revenue Base: The port has large and diverse revenue streams between and within its airport, seaport, and real estate divisions, including tax levy revenues that are assessed over the Port District that is co-terminus with King County. The airport division contributes nearly 74% of total operating revenues while the seaport division generates 20%. The new airline use and lease agreement is hybrid compensatory with both coverage payment triggers and some surplus revenue sharing components. Revenue Risk-Price: Mid-range.
--Conservative Debt Structure: Following the issuance of the series 2013 bonds, approximately 89% of the port's debt is in fixed rate mode. Structural features are sound. Debt Structure: Stronger.
--Stable Historical Coverage, Moderate Leverage: The port's debt service coverage ratios (DSCRs) have historically been healthy with senior, intermediate, and all-in coverage of 2.4 times (x), 1.7x, and 1.5x in 2012. Leverage, as represented by net debt to cash flow available for debt service (CFADS), is moderate at 6.9x while debt per enplanement is somewhat higher than average at $156, respectively. Cost per enplanement (CPE) was above average compared to other large-hub airports in 2012 at $13.23. Management expects CPE to rise to $15.28 by 2017.
--Large Scale Capital Program with Future Borrowings: The port contemplates a sizable $1.9 billion capital program through 2018. Financial flexibility could be strained if most or all of the contemplated $1.05 billion in future borrowings are issued for this capital program during the forecast period. The utilization of the port's multiple lien levels for the additional debt could affect the respective coverage ratios at each lien. Infrastructure Development/ Renewal: Stronger.
--Narrow PFC Revenue Stream but Strong Legal Covenants & Metrics: A substantial overall air traffic market supports large annual PFC collections. At current PFC leverage, fiscal 2012 PFC collections provide very strong coverage of 3.1x maximum annual debt service (MADS).
RATING SENSITIVITIES
--Increases in overall leverage that materially affect DSCRs on any lien level and/or reduce all-in debt service coverage meaningfully below current forecasts could pressure the ratings or result in different rating distinctions between the various revenue bond liens.
--Significant increases in the port's operating costs or notable declines in annual port and aviation sector revenues could weaken credit quality.
--Lower PFC coverage levels as a result of additional leveraging or declining trends in PFC receipts could place pressure on the PFC lien at the current rating level.
SECURITY
The first-lien revenue bonds are secured by the net revenue pledge of all of the port's revenues, including the airport, seaport, and real estate divisions. The intermediate-lien is secured by a net revenue pledge that is subordinated to the first lien, and the subordinate-lien is secured by net revenues that are junior in payment to the intermediate lien. The final maturity on all revenue bonds is 2040. The PFC revenue bonds are solely secured by a first lien on PFC revenues with a final maturity in 2023.
The rating distinction between the revenue bond liens reflects the variation in bond legal covenants and the amount of leverage at each lien level. While there are no legal provisions that dictate the use of any particular lien for any particular purpose, the port has historically issued debt on the first-lien for seaport purposes, intermediate-lien for airport purposes, and variable rate debt on the subordinate lien. The port has approximately 11% in outstanding variable rate debt and has a policy to have no more than 25% outstanding.
TRANSACTION SUMMARY
The Port of Seattle is issuing $139 million in 2013 intermediate lien revenue refunding bonds to refund its first lien 2003B bonds for savings and to make necessary deposits in the reserve fund to replace the existing bonds' surety with a cash reserve. NPV savings are estimated at $12.3 million, or 8.95% of refunded bonds.
Historical traffic resilience is evidenced by enplanement declines in only three years since 1998, most recently in 2009 at 3%. Enplanements have grown annually since, with growth of 1%, 4%, and 1.2% recorded in 2010, 2011, and 2012, respectively. For the first nine months of 2013, enplanements are up 4.7% from the same period last year which is ahead of the port's projection of 2.2% projected for the full year. The airport enjoys a strong O&D base (approximately 73%) and its domestic travelers comprised 90% of enplanements in 2012. The airport's cost per enplaned passenger rose in 2012 to $13.23 from $11.76 in 2011 and is somewhat above those of other large hub airports. CPE is expected to increase to $15.28 as approximately $1.05 billion in additional debt is issued over the next five years in the context of the port's capital program.
Seaport container traffic exhibited strong growth of 35% in 2010 and has recorded declines of 5% and 8.1% for 2011 and 2012, respectively. Container traffic continued to show some weakness through the first half of 2013, largely due to the departure of the Grand Alliance, but has shown gains in September 2013. The declining container traffic has had an impact on the seaport's financials to a much lesser degree than otherwise expected because the port's lease structure for marine terminals is based on a per-acre rate (which were readjusted every five years) rather than on volume. Going forward, leases are based on volume with per-acre minimum annual guarantees (MAG) that feature inflationary adjustments, and the port's financial projections reflect only the MAG amounts. The lease at Terminal 46, which was due to expire in 2015, was extended through 2025, though at a rate lower than that previously charged. This new container lease structure is consistent with market norms, and due to Most Favored Nation clauses in the terminal contracts, has been applied to all four container terminals at the port.
A new airline use and lease agreement was adopted by the port Commission in September 2013, and will run through December 2017; airline approval was received on Nov. 12. The agreement will be retroactive to Jan. 1, 2013, and a year-end adjustment will align actual revenues with the new agreement, resulting in a one-time rate adjustment (largely offset by the release of the security fund associated with the previous agreement). There are no exclusive use gates under the agreement. The most significant change from the prior agreement is the inclusion of revenue sharing with signatory carriers when debt service coverage is above 1.25x. In addition, carriers can now delay project construction for 12 months through the MII provision (compares to a six-month negative provision in the prior agreement).
The airport comprises the largest percentage of total operating revenues for the port at nearly 74%, followed by the seaport at 20%, and the real estate division comprising the remainder. From 2002 - 2012, the airport's operating revenues outperformed expenses with a compound annual growth rate (CAGR) of 5.8% and 3.8%, respectively. During the same period, the seaport's operating revenues grew at a 1.6% CAGR, but expenses declined at a 6.1% CAGR. The real estate division was created in 2008, and its revenues declined at a 2.6% CAGR through 2012 while expenses dropped at a 3% CAGR over the same period. Total operating revenues grew 8% in 2012 and total operating expenses grew at a somewhat higher 11.5% rate, due in part to the opening of a new consolidated rental car facility in May 2012. Through the third quarter of 2013, operating revenues were 2.2% above the same period a year prior. Aviation revenues are down due to the change in airline agreements. Operating expenses are up 6.4%. Operating expenses increased primarily due to the airline realignment project on the airport side, which is now complete The port's liquidity at the end of 2012 was somewhat below peers at 133 days cash on hand; however, the port has a policy of maintaining nine months of operating expenses in its operating fund balance and at the end of 2012 held approximately twice that rate.
PFC revenues for fiscal 2012, generated by the $4.50 fee assessed on passengers, resulted in DSCR of 3.3x. MADS coverage based on 2012 PFC revenues (without interest earnings) was similarly strong at 3.1x. Based on the airport's traffic and PFC collection forecast, coverage levels on this lien are mainly expected to remain above 3x through the term of the debt, provided no additional PFC revenue bond issuances. The PFC bonds have a final maturity in 2023.
Based on Fitch's calculation, applying PFCs and CFCs as revenue, debt service coverage on the first lien was 2.43x in 2012, up from 2.17x in 2011. Intermediate lien coverage of 1.67x was relatively unchanged from the 2011 level. Meanwhile coverage of all obligations (essentially subordinate lien coverage) was 1.51x in 2012, in line with the 2011 level.
The Port of Seattle is a municipal corporation of the state of Washington and owns and operates the port's marine facilities at the Seattle Harbor, the Seattle-Tacoma International Airport, and various industrial and commercial properties.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Airports' (Nov. 27, 2012);
--'Rating Criteria for Ports' (Oct. 3, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600
Rating Criteria for Ports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719985
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808793
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