Fitch Rates Port of Seattle, WA 2015 Intermediate Bonds 'A+'; Affirms Outstanding
--$653.9 million in first lien revenue bonds at 'AA';
--$1.5 billion in intermediate lien revenue bonds at 'A+';
--$165.1 million in subordinate lien revenue bonds at 'A';
--$135.1 million in passenger facility charge (PFC) revenue bonds at 'A'.
The Rating Outlook is Stable for all bonds.
KEY RATING DRIVERS
The ratings reflect the Port's 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 4x, while intermediate and subordinate lien coverage is also strong in the 1.5x range per Fitch's calculations. The considerable gap between first lien and intermediate lien coverage supports the two notch differential between the liens, as does the difference in leverage at each lien level. While a sizable capital program is underway with additional borrowing expected for roughly 50% of the plan, leverage 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 (74% origination and destination for FY 2014). 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. Starting in 2016, the Northwest Seaport Alliance between Seattle and Tacoma 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: Midrange.
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 nearly 76% of 2014 total operating revenues while other businesses generated 24% of revenues; businesses that are expected to be licenced to the seaport alliance generated 13% of revenues. The airline use and lease agreement is hybrid compensatory with both coverage payment triggers and some surplus revenue sharing components.
Infrastructure Development/Renewal: Stronger.
Large Scale Capital Program with Future Borrowings: The port contemplates a sizable $2.3 billion capital program for 2015 through 2020 with 87% of the capital budget focused on aviation. Financial flexibility could be strained if most or all of the contemplated $1.25 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 (senior)/Midrange (intermediate and sub).
Conservative Debt Structure: 88% of the port's debt is in fixed rate mode. Structural features are sound. Fitch notes that all lien levels are open for future borrowings, though the outstanding debt benefits from amortizing profiles with level or declining annual debt service requirements.
Financial Metrics
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 4.1x, 1.5x, and 1.4x in 2014. 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 two notch 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 6.1x. Debt per enplanement is somewhat higher than average at $136. Cost per enplanement (CPE) was above average compared to other large-hub airports in 2014 at $11.48, though this represents a drop from 2013. Management expects CPE to rise to $14.01 by 2020.
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 2014 PFC collections provide very strong coverage of 3.4x maximum annual debt service (MADS).
Peers: Port of Seattle compares favourably to other consolidated entities with airport and port operations, such as Massport (rated 'AA' by Fitch) and Oakland (rated 'A+'/'A-'), or multiple airport systems, such as MWAA (rated 'AA-'). While Seattle's leverage is higher than Massport, it is comparable to levels seen at Oakland and is higher lower than MWAA's. CPE compares favorably to Oakland, Massport, and MWAA.
RATING SENSITIVITIES
Negative - 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.
Negative - Significant increases in the port's operating costs or notable declines in annual port and aviation sector revenues could weaken credit quality.
Negative - 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.
Positive - Given the current rating levels and the ongoing capital program with sizable borrowings expected, upward rating migration is unlikely at this time.
SUMMARY OF CREDIT
The Series 2015 bonds, series A, B, and C, are being issued as fixed rates Intermediate Lien Revenue Bonds. Net proceeds will fund approximately $244.6 million in 2015 - 2020 Capital Program costs, reimburse the Port for approximately $46 million in capital project expenditures in 2014, and refund outstanding Series 2005A Intermediate Lien Revenue Bonds for estimated NPV savings of $37 million, or 11.5%. A portion of net proceeds will also be used to satisfy debt service reserve fund requirements, fund capitalized interest, and pay certain costs related to the issuance.
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 robust growth of 7.7% in 2014. For the first five months of 2015, enplanements are up a further 13.5% from the same period last year which is ahead of the port's forecast of 10% enplanement growth for the year. Delta's rapid expansion at the airport, as well as competitive responses from other carriers, has enabled a faster pace of traffic growth over the past year. The airport enjoys a strong O&D base (73.7% in 2014) and its domestic travelers comprised 90% of enplanements in 2014. The airport's CPE fell in 2014 to $11.48 from $11.88 in 2013, and is somewhat above those of other large hub airports. CPE is expected to increase to the $14 range by 2020 as approximately $1.15 billion in additional debt is issued over the next five years in the context of the port's capital program.
After registering strong growth in 2010, seaport container traffic has seen declines in recent years, largely due to the departure of the Grand Alliance. Harbor container volumes were down 11.3% in 2014, following declines of 15.5% in 2013 and 8.1% in 2012. In July 2014, the Port and Eagle Marine Services (EMS), tenant at Terminal 5 (T5), agreed to terminate EMS's lease. Under the terms of the termination agreement, a portion of EMS traffic shifted to T18 (guaranteed volume of 150,000 lifts and 50 vessel calls per year for 10 years). The Port is also receiving $9 million a year for 10 years as a termination payment, and the port is pursuing interim use of the terminal while it prepares for redevelopment to accommodate larger ships at the facility. Year to date for 2015, TEUs are up 7.3%. For 2015 and beyond, Port is forecasting modest growth of 1.8%.
The airport comprises the largest percentage of total operating revenues for the port at 76%, while other businesses generated 24% of revenues; facilities that are expected to be licenced to the seaport alliance generated 13% of revenues. Operating revenues fell 1.9% in 2014, reflecting the seaport lease termination at T5, resulting in a reduction of Seaport revenues; and a decrease in airport revenues because of a one-time $17.9 million increase in 2013 due to elimination of the prior airline agreement's security fund liability. This compares to increase of 4.5% in 2013. Over the last five years revenues have growth at a CAGR of 3.8%. For the first quarter of fiscal 2015, revenues are up 3.7% over a year prior, and are slightly above budget.
PFC revenues for fiscal 2014, generated by the $4.50 fee assessed on passengers, resulted in DSCR of 3.7x. MADS coverage based on 2014 PFC revenues (without interest earnings) was similarly strong at 3.4x. 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. 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 4.15x in 2014, up from 3.47x in 2013. Intermediate lien coverage of 1.48x was slightly below the 2013 level. Meanwhile coverage of all obligations (essentially subordinate lien coverage) was 1.39x in 2014, slightly down from the 2013 level.
Looking forward, Fitch's base case scenario considers enplanement growth of 3.3% on average through 2024, resulting in airport revenue growth of 4.6%, and flat revenue growth from the Seaport Alliance, resulting in overall average revenue growth of 3.9% through 2024. The base case assumes 4% expense growth, as well as implementation of the full borrowing plan, resulting in average coverages of 5.43x, 1.50x, and 1.34x on the senior, intermediate, and subordinate liens respectively. CPE rises to a high of $14.54, but drops to $13.83 by 2024. All in leverage rises with the borrowing plan, but falls to 4.5x net debt to CFADS by 2024. Under Fitch's more conservative rating case, which considers a 5% drop in enplanements at the airport and a 4% decline for the Seaport Alliance coupled with slow recoveries from these dips and higher annual expense growth, average coverages are still robust and well above covenant levels at 4.80x, 1.37x, and 1.22x on the senior, intermediate, and subordinate liens respectively. CPE rises to a high of $16.56 under this scenario, but still compares relatively favorably to peers. Leverage is a manageable 5.3x by 2024.
On Oct. 14, 2014, the Port of Seattle entered into an interlocal agreement with the Port of Tacoma to serve as a framework for the creation of the Northwest Seaport Alliance. The purpose of the Seaport Alliance is to unify management and operation of both marine ports' cargo terminals and related functions to improve the Seattle-Tacoma gateway's competitive position in the container industry. Combined, Seattle and Tacoma are the third largest gateway in the nation, behind Los Angeles/Long Beach and New York/New Jersey.
The Seaport Alliance will be formed as a Port Development Authority (PDA) - a jointly owned, governmental entity, but each port would retain 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. Joint venture accounting (50%/50% split between partners), with funds flowing back at least quarterly. The ports will contribute to capital construction subject to Managing Member approval; capital funding will not come from working capital. Soft start-up is expected August 4, 2015, and financial structure change is planned for January 1, 2016.
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.
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 12% in outstanding variable rate debt and has a policy to have no more than 25% outstanding.
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