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.
Future Developments that May, Individually or Collectively, Lead to Negative Rating Action:
- 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.
Future Developments that May, Individually or Collectively, Lead to Positive Rating Action:
Given the current rating levels and the ongoing capital program with sizable borrowings expected, upward rating migration is unlikely at this time.
The port is issuing approximately $17 million in series 2017A intermediate lien revenue refunding bonds and approximately $266 million in series 2017B intermediate lien revenue refunding bonds. The bonds are being issued to advance refund all or a portion of the eligible series 2009A and 2009B-1 bonds, resulting in approximately $69 million in NPV savings. The amortization structure is being modified to address near-term debt service gaps, which results in modest debt service growth of approximately 1% annually beginning in 2020 through final maturity in 2036.
The port is also issuing $320 million in series 2017C intermediate lien revenue bonds and approximately $96 million in 2017D bonds intermediate lien revenue bonds. The new money bonds are being issued to finance capital improvements to aviation facilities and to reimburse the port for related costs. Proceeds will also cover capitalized interest, required deposits to the debt service reserve, and costs of issuance. Bonds are fixed rate with final maturity in 2042 and benefit from level debt service through maturity.
Airport traffic performance continues to remain a key strength to the port’s operations. Enplanements grew 8% in fiscal 2016, building upon robust growth of 12.8% in 2015. Year to date through May 2017, enplanements continue to grow at 3.8%. Delta’s continued expansion at the airport, as well as competitive responses from other carriers, new international services, and general growth in the region’s economy have enabled a faster pace of traffic growth in recent years but are also necessitating capital improvements to ensure efficient processing of passengers through the port facilities. The airport enjoys a strong O&D base (approximately 69%) and domestic travelers comprised 89% of enplanements in 2016. The airport’s CPE for 2016 was competitive compared to other large hubs at $10.10, and CPE is expected to increase modestly in 2017 to $10.84.
Increasing passenger levels at the port have placed strains on existing infrastructure, necessitating the sizable $2.9 billion aviation portion of the CIP underway through 2022. Projects include the addition of interim capacity at the airport, renovation of the North and South Satellites, enhancements to baggage screening efficiency and capacity, and improvements to international arrivals capabilities. CPE is anticipated to further increase to the $16 range by 2022 as approximately $1.9 billion in additional debt is issued in the context of the port’s capital program.
The airport’s current airline agreement is expiring in December of 2017. While negotiations are currently underway with carriers, no new agreement has yet been reached. The port expects to be able to continue to set rates to achieve 1.25x debt service coverage, with revenue sharing above those levels; however, if an agreement is not met, the port may continue the current agreement on a month-to-month basis. The port may also apply rates and charges by resolution, as it has done in the past. While Fitch will monitor progress towards a new airline agreement, it is comfortable that the port will continue to have adequate contractual frameworks in place in order to ensure adequate debt service coverage.
The airport comprises the largest percentage of total operating revenues for the port at 78%. Strong passenger performance has in turn driven steady growth in non-aero revenues, with non-aero revenues rising 11% annually since 2012. 2016 saw a 12% increase led by parking and dining/retail growth. Overall operating revenues increased 7% in fiscal 2016.
Non-airport activities represented roughly 22% of operating revenues in 2016, slightly lower than prior years. The recent implementation of the seaport alliance with the Port of Tacoma appears to indicate sound performance. The port’s share of joint venture revenues for 2016 was $62 million; fiscal 2017 revenues are expected to be lower at $47 million due to one-time receipts in 2016, the vacancy of Terminal 5, and expected higher expenses. These results should only have a modest impact to the port’s consolidated net revenue generation.
PFC revenues have also benefited from rising passenger levels. For fiscal 2016, PFCs generated by the $4.50 fee assessed on passengers resulted in DSCR of 4.38x. MADS coverage based on 2016 PFC revenues (without interest earnings) was similarly strong at 4.1x. Based on the airport’s traffic and PFC collection forecast, coverage levels on this lien are mainly expected to remain above 4x through the term of the debt, provided no additional PFC revenue bond issuances. PFC leverage is very low at 1.10x and should evolve downward as the PFC bonds mature by 2023.
Based on Fitch’s calculation, applying PFCs and CFCs as revenue, debt service coverage on the first lien was 5.89x in 2016, up from 4.57x in 2015. Intermediate lien coverage of 1.79x was above the 2015 level. Meanwhile coverage of all obligations (essentially subordinate lien coverage) was 1.71x in 2016, higher than coverage seen in the last five years.
Fitch’s base case scenario considers enplanement growth of 1.9% on average through 2022, together with airport revenue growth of 7.1%, and 1.5% growth for other port businesses, resulting in overall average revenue growth of 6.5% through 2020. The base case assumes revenues and expenses are evenly matched, with 6.1% expense growth, as well as implementation of the full borrowing plan, resulting in average coverages of 6.2x, 1.6x, and 1.3x on the senior, intermediate, and subordinate liens respectively. CPE rises to a high of $16.60 by 2022. All in leverage rises with the borrowing plan, but falls to the range of 3x net debt to CFADS by 2022.
Under Fitch’s more conservative rating case, which considers a 5% drop in enplanements at the airport and flat growth for other port businesses coupled with slow recoveries from these dips and higher annual expense growth, average coverages are still robust and well above covenant levels at 5.5x, 1.4x, and 1.2x on the senior, intermediate, and subordinate liens respectively. CPE rises to a high of $18 under this scenario, but still compares relatively favorably to peers. Leverage is manageable in the 4x range by 2022.
For both the base and rating cases, applying the remaining tax levy capacity to the net cashflow, pursuant to the bond resolution calculation, improves the projected senior lien DSCR by 50 basis points while also improving the DSCRs for the intermediate and subordinate liens by a narrower 10 to 20 basis points. This additional financial cushion is considered in the ratings.
The Port of Seattle is a municipal corporation of the state of Washington and owns the port’s marine facilities at the Seattle Harbor, the Seattle-Tacoma International Airport, and various industrial and commercial properties. Certain container terminals and industrial properties are operated by the Northwest Seaport Alliance.
The Seaport Alliance was formed as a Port Development Authority (PDA) - a jointly owned, governmental entity. Each port retains its existing governance structure, ownership of existing assets under Seaport Alliance management, and obligation to repay debt to its bondholders. The PDA will not borrow funds, and employs joint venture accounting (50%/50% split between partners), with funds flowing back at least quarterly. The ports contribute to capital construction subject to Managing Member approval. Joint financial reporting began Jan. 1, 2016. Thus far, each port has contributed funds for working capital, working capital reserves, and capital construction.
Variation from Published Criteria
Fitch’s analysis includes a variation from the ‘Rating Criteria for Infrastructure and Project Finance’. Enhanced analysis under the variation relates to the evaluation of the strength of the tax revenue framework available to support operations. This evaluation is supported by Fitch’s revised ‘U.S. Tax-Supported Rating Criteria’ dated April 18, 2016.