- Increases in borrowings that increase all-in leverage above 8x and/or reduce all-in debt service coverage below 1.3x on a sustained basis;
- Significant increases in the port's operating costs or notable declines in annual port and aviation sector revenues.
Fitch Rates Port of Seattle Intermediate Lien Revs and Refunding Bonds ‘AA-’; Outlook Stable
posted by AJOT | Jul 17 2017 at 07:25 AM | Ports & Terminals
Fitch Ratings has assigned a 'AA-' rating to the expected $699.5 million in Port of Seattle, WA (the port) intermediate lien revenue and refunding bonds, series 2017ABCD. The Rating Outlook on the bonds is Stable.Fitch also maintains ratings on the port's other outstanding bonds, including limited tax general obligation (LTGO) bonds, senior lien bonds, existing intermediate lien bonds, subordinate lien bonds, and passenger facility charge bonds. For more information on these ratings, please refer to the press release 'Fitch Rates Port of Seattle LTGOs 'AA-', Downgrades Outstanding GOs on Criteria Revision; Upgrs Revs', dated Jan. 23, 2017.
KEY RATING DRIVERS
Summary: The port's intermediate lien revenue bond rating reflects the strong position in the Seattle market for both air service at Seattle-Tacoma International Airport (Sea-Tac) and cargo at the seaport. First lien coverage is strong at over 5.8x in 2016, while intermediate and subordinate lien coverage is also healthy in the 1.7x range per Fitch's calculations. The considerable gap in debt coverage and leverage between first lien relative to the intermediate and subordinate lien coverages support the notch differential between the liens. While a sizable capital program is underway with additional borrowing expected for roughly 58% of the plan, leverage at the different lien levels is expected to remain consistent with the current rating levels.
Revenue Risk - Volume: Stronger
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 (69.4% origination and destination for FY 2016). Delta's expansion at the airport, as well as competitive responses from Alaska and other carriers, has enabled a faster pace of traffic growth in recent years. The Northwest Seaport Alliance jointly formed between the Ports of Seattle and Tacoma, which had its financial start in January 2016, may have a stabilizing effect on cargo volumes in Puget Sound, though the ports continue to operate 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 - Price: Stronger
Diverse Revenue Base: The port has large and diverse revenue streams between and within its airport, seaport, and other divisions, including tax levy revenues that are assessed over the Port District that is co-terminus with King County. The airport division contributed roughly 78% of 2016 total operating revenues while other businesses generated 22% of revenues. The airline use and lease agreement is hybrid compensatory with strong cost recovery provisions and surplus revenue sharing components. The current agreement is scheduled to expire at the end of 2017, and the port is in the process of negotiating a new agreement with the carriers. Should no agreement be reached, the port may continue month to month under the existing agreement or may apply rates by resolution, previously been approved by the Port Commission.
Infrastructure Development/Renewal: Stronger
Large Scale Capital Program with Future Borrowings: The port contemplates a sizable $3.3 billion capital program through 2022 with 88% of the capital budget focused on aviation. Financial flexibility could be strained if most or all of the contemplated $1.9 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.
Debt Structure: Stronger (Sr); Midrange (Intermediate and Sub)
Conservative Debt Structure: 89% of the port's revenue bond debt is in fixed rate mode. Structural features are sound. All lien levels are open for future borrowings, and the current refunding transfers a portion of outstanding senior lien indebtedness to the intermediate lien, though all outstanding debt benefits from amortizing profiles with level or declining annual debt service requirements.
Financial Profile: The port's debt service coverage ratios (DSCRs) have historically been healthy with senior, intermediate, and all-in coverage of 5.9x, 1.8x, and 1.7x in 2016. Historical and projected DSCRs in the plan of finance indicate much higher DSCRs for first lien debt than for intermediate and subordinate lien debt, supporting the differential to the intermediate lien. Senior leverage, as represented by net debt to cash flow available for debt service (CFADS), is cash positive, while total leverage is moderate at 6.7x. Cost per enplanement (CPE) was competitive versus other large-hub airports in 2016 at $10.10. Management expects moderate CPE increases to above $16 by 2022.
Peer Group: Port of Seattle compares favorably to other consolidated entities with airport and port operations, such as Massport ('AA') and Oakland ('A+'/'A'), or multiple airport systems, such as MWAA ('AA-'). While Seattle's leverage is higher than Massport, it is comparable to levels seen at Oakland and is lower than MWAA's. CPE compares favourably to Oakland, Massport, and MWAA.
RATING SENSITIVITIES
Future Developments that May, Individually or Collectively, Lead to Negative Rating Action: