New York, June 09, 2017 -- Issue: Intermediate Lien Refunding Revenue Bonds 2017 Series F (Private Activity/Non-AMT); Rating: A2; Rating Type: Underlying LT; Sale Amount: $30,350,000; Expected Sale Date: 06/21/2017; Rating Description: Revenue: Government Enterprise;
Issue: Intermediate Lien Refunding Revenue Bonds 2017 Series G (Federally Taxable); Rating: A2; Rating Type: Underlying LT; Sale Amount: $38,330,000; Expected Sale Date: 06/21/2017; Rating Description: Revenue: Government Enterprise;
Issue: Intermediate Lien Refunding Revenue Bonds 2017 Series D (Private Activity/AMT); Rating: A2; Rating Type: Underlying LT; Sale Amount: $99,595,000; Expected Sale Date: 06/21/2017; Rating Description: Revenue: Government Enterprise;
Issue: Intermediate Lien Refunding Revenue Bonds 2017 Series E (Governmental/Non-AMT); Rating: A2; Rating Type: Underlying LT; Sale Amount: $91,070,000; Expected Sale Date: 06/21/2017; Rating Description: Revenue: Government Enterprise;
Summary Rating Rationale
Moody's Investors Service has upgraded the Port of Oakland, California's $656 million of senior lien bonds to A1 from A2, $324 million of intermediate lien bonds to A2 from A3, and subordinate lien bank note rating to A3 from Baa1. Moody's has assigned an A2 rating to the port's $260 million Intermediate Lien Refunding Bonds, Series 2017 (DEFG). The outlook is stable.
The upgrades reflect significant improvement in the port's credit profile, driven by a long-term and ongoing deleveraging; strengthened activity levels in its two principal business lines; improved debt service coverage ratios (DSCRs) and a materially improved cash position.
From FY 2009 - 2017, enplanements and twenty-foot equivalent units (TEUs) will have increased by an estimated 26% and 16%, respectively, stabilizing the port's primary businesses and driving improvements in consolidated DSCRs. Over the same period, debt outstanding has decreased by 30%, while unrestricted cash is estimated to have increased more than fourfold.
The strengthened activity levels, DSCRs and cash position provide greater financial flexibility for the port, and are complemented by a trajectory of decreasing leverage, which we expect will continue. The port is scheduled to amortize $376 million of principal over the next five years (includes $94 million of commercial paper), and has sufficient sources to fund its capital budget without additional long-term debt (expects to issue $24 million of commercial paper).
The ratings reflect the strong security pledge of consolidated revenues and our expectation that the combined enterprise will continue to produce senior net revenue DSCRs between 2.5-3.0 times and intermediate net revenue DSCRs between 1.5-1.7 times.
We expect continued operational stability in the port's two largest divisions, aviation and maritime, as these businesses have relatively stable and imperfectly correlated demand profiles, competitive assets, and benefit from their roles as providers of essential infrastructure for large and economically robust - and ultimately different - service areas. While both businesses have cyclical aspects of demand, the port's strong financial profile and manageable short-term capital needs provide flexibility to manage fluctuations in activity.
At the same time, the ratings reflect our view that operating cost pressures and competitive constraints on pricing will continue to challenge margins in the port's primary business lines, and that the port's cash position will narrow from the current level as cash is contributed for capital spending over the next five years.
The stable outlook reflects our expectation of stability in air passenger traffic and marine cargo volume; ongoing vitality in the regional economy; and manageable risk in the maritime division due to the landlord model employed, which will support financial stability through a period of operational transition and potential short term revenue volatility. These factors combine to support our expectation of continued healthy financial performance and strong DSCRs in aviation, stable financial performance and satisfactory intermediate DSCRs in maritime, and intermediate DSCRs of 1.5 - 1.6 times for the combined enterprise as a whole.
Factors that Could Lead to an Upgrade
Extension of major marine terminal leases with fixed revenues providing greater revenue visibility and insulation from cargo volatility
Intermediate DSCRs for maritime maintained above 1.5 times for a sustained period
Continued deleveraging combined with the maintenance of 500 days cash on hand
Continued enplanement growth, coupled with the prospective maintenance of a competitive cost per enplanement (CPE) and low leverage, in the aviation division
Factors that Could Lead to a Downgrade
Inability to align operating costs with operating revenues to sustain current and expected DSCRs
Significant declines in maritime revenues, with maritime intermediate DSCRs below 1.25 for a sustained period
Multi-year trend of enplanement declines and or air service reductions
Significant deterioration in DSCRs and liquidity for the combined enterprise, with intermediate DSCRs below 1.4 times for a sustained period
The senior lien bonds, intermediate lien bonds and subordinate lien obligations are secured by a pledge of gross revenues on a senior, intermediate and subordinate basis, respectively. PFCs, CFCs, and certain other amounts are specifically excluded from pledged revenues. The rate covenant for the senior lien bonds is 1.25 times aggregate annual senior lien debt service coverage by net revenues, and the additional bonds test (ABT) is 1.25 times maximum annual senior lien debt service (MADS) based on net revenues. The senior lien bonds are secured by a common reserve fund, sized at average annual debt service and funded with cash.
The intermediate lien rate covenant is 1.10 times coverage of aggregate annual intermediate lien debt service by net revenues. The ABT is equal to 1.10 times coverage of aggregate MADS (intermediate) using net revenues from any of the 12 consecutive months out of the 24 consecutive months immediately preceding. The intermediate lien bonds are secured by a common reserve fund, sized at average annual debt service and funded with an investment grade surety.
The subordinate lien bank note rating applies to the bank note that would arise should the provider make a liquidity payment that is not reimbursed by the port. Under the terms of the reimbursement agreement with both banks, after 90 days any liquidity payment not reimbursed would become a term loan due to the bank and covered by the bank note in the reimbursement agreement. The liquidity would bear interest at an elevated rate and principal payments would be accelerated to be paid within three years.
There is currently no other debt on parity with the commercial paper or residing below the intermediate lien bonds. The one notch distinction between the intermediate lien debt and bank note rating reflects the subordinate status of the bank note in the priority of claims and the lack of limitation on the amount of debt that could be issued above the commercial paper on the subordinate lien (there is a rate covenant on the intermediate lien, which provides a degree of limitation).
Use of Proceeds
Proceeds will be used to refund the port's 2007 intermediate lien bonds within the current maturity schedule.
The Port of Oakland is an independent department of the City of Oakland (Aa2 stable), per the city charter. Exclusive control and management of port facilities were delegated to the board in 1927 by an amendment to the city charter.
The port operates three principal divisions, maritime (44% of FY 2016 operating revenues), aviation (51%) and commercial real estate (5%).
The seaport is the 3rd busiest seaport in California and the 7th busiest seaport in the US as measured by TEUs. OAK is a medium hub, 86% O&D airport and is the 4th busiest airport in California and the 2nd busiest airport in the San Francisco Bay Area.
The principal methodology used in this rating was Public Port Revenue Bonds published in December 2013. The additional methodology used in this rating was Publicly Managed Airports and Related Issuers published in November 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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