OREANDA-NEWS. Fitch Ratings affirms the ratings for the following Port of Oakland, CA (the port) outstanding revenue bonds:

--$682.3 million senior lien revenue bonds at 'A+';
--$392.8 million intermediate lien revenue bonds at 'A-'.

The Rating Outlook for both liens is Stable.

RATING RATIONALE

The senior bonds' 'A+' rating reflects diverse revenues from aviation, maritime, and commercial real estate operations. Residual airline agreements at Oakland International Airport (the airport) coupled with long term contracts generating 80% of maritime operating revenues provide stability for the port's revenue profile and for debt service coverage. The capital improvement plan is manageable with 13% of the program projected to be funded with debt backed by passenger facility charges (PFCs).

The junior bonds' 'A-' rating reflects the aforementioned factors but also considers lower coverage levels and the subordinate nature of the intermediate lien.

KEY RATING DRIVERS
O&D Traffic Base Exposed to Competition: The port benefits from its sizeable enplanement base and maritime cargo operations within the large, economically diverse, and wealthy San Francisco Bay Area. These strengths are somewhat offset by high dependence on the Pacific Rim for maritime trade, significant competition from nearby airports, and the airport's very high concentration in Southwest Airlines. Concentration concerns are somewhat mitigated by the airport's primarily origin and destination (O&D) traffic profile.
Revenue Risk- Volume: Midrange

Diverse, Stable Revenue Base: The port benefits from its diverse revenue base, with revenues split fairly evenly between its maritime and aviation divisions. Fitch views positively the revenue stability inherent to the airport's cost center residual airline use and lease agreement (AUL), which expires in late 2016. Costs per enplanement (CPE) equalled $11.22 in fiscal 2014, which is roughly average for an airport of Oakland's size. Long-term contracts with robust minimum annual guarantees (MAGs) account for a substantial 80% of maritime operating revenues, providing downside revenue protection.
Revenue Risk- Price: Stronger

Conservative Debt Structure: Both senior and intermediate lien port revenue bonds are fixed rate with no refinancing risk; subordinate CP is variable rate and has some refinance risk. All bond reserves are cash funded, except for approximately $36 million funded with a surety policy. The notching distinction between the liens reflects the subordinate nature of the intermediate lien.
Debt Structure: Stronger (senior); Midrange (intermediate)

Manageable Capital Plan with Possible Future Borrowing: The port's five-year $480 million capital plan is manageable, with $361 million dedicated to aviation related projects and $112 million to maritime division projects. Approximately $64 million is currently expected to be funded in future years with PFC-backed debt, while the balance will be funded with a combination of grants, pay-as-you-go PFCs and internal liquidity.
Infrastructure Development/Renewal: Midrange.

Stronger Senior Financial Metrics: The port's liquidity is solid with fiscal 2014 unrestricted cash of $203 million, or 439 days cash on hand, senior leverage is low at 2.7x, and the senior debt service coverage ratio (DSCR) is robust at 3.34x. The intermediate lien's financial metrics are less robust, with leverage at a moderate to high 5.4x, and a materially lower DSCR of 1.62x.

Peers: The port's credit profile is weaker than its consolidated peers such as Massport (Revenue bonds rated 'AA'/Outlook Stable) and the Port of Seattle (first lien revenue bonds rated 'AA'/Outlook Stable). Massport's higher rating reflects its superior franchise strength as a very large international gateway. The Port of Seattle's higher rating reflects its much larger size and its strong competitive position within the Pacific Northwest.

RATING SENSITIVITIES
Negative: A material reduction of the current traffic base or a major service reduction of the port's anchor carrier, Southwest Airlines, without substantial back-filling by other airlines.
Negative: Inability or unwillingness to extend or replace the airport's AUL, expiring in 2016, on terms that provide for a continued strong cost recovery framework.

Negative: Significant increases in the port's cost profile leading to a demonstrable loss of competitiveness, or notable and sustained declines in ongoing maritime and aviation sector revenues.

Positive: Fitch views the rating as unlikely to migrate higher due to the competitive nature of the service area and the expectation that operational and performance metrics are unlikely to improve materially over Fitch's forecast horizon.

SUMMARY OF CREDIT

The port's aviation and maritime activities, its two major enterprises, have largely recovered after experiencing steep activity declines during the recession. On the aviation side, enplanements fell slightly by 0.5% in fiscal 2014 and then rapidly grew by 8.5% in fiscal 2015. Based on year-to-date enplanement growth, management expects fiscal 2016 enplanement growth of 3.8%. Fitch believes that continued regional economic growth will drive enplanement growth at moderate levels moving forward. CPE increased somewhat in fiscal 2014 to $11.22 from $10.28 a year prior due predominantly to lower enplanements and higher terminal rents. However, CPE fell moderately to $10.48 in fiscal 2015, based on unaudited actual data, due to increased enplanements. Fitch views the current CPE level as midrange for the airport's size and traffic profile.

Concentration risk remains a concern, with Southwest accounting for nearly 70% of enplanements in fiscal 2014, though this risk is partially offset by the high share of O&D traffic (approximately 92% in 2015) using the airport. Fitch views positively the airport's three-year AUL, expiring in 2016, whose airline cost center residual rate-setting methodology provides the airport with a strong cost recovery framework. The current rating incorporates Fitch's expectation that the contract would either be renewed in substantially similar form, or that a revised contract would provide a similarly strong cost recovery framework.

The seaport's cargo traffic, as measured by loaded twenty foot equivalent units (TEUs), fell 0.2% in calendar 2014 and is estimated to fall 6.5% in fiscal 2015. The declines reflect expanding economic activity offset by labor unrest at the start of 2015 (for more information on the labor slowdown see 'Fitch: West Coast Labor Seesaw Leaves Reliability Question' dated Feb. 24, 2015). Although the cargo declines will negatively impact revenues, long-term contracts with MAGs make up a substantial 80% of maritime revenues, thus providing a material financial mitigant. Moving forward, the port projects modest cargo growth ranging from 1%-3% through fiscal 2020. Based on the region's strong and expanding economy, Fitch views the projection as reasonable though susceptible to shifts in the seaport's competitive position among west coast ports, especially for discretionary cargo.

The port's consolidated financial performance was solid in fiscal 2014, with the all-in DSCR rising to 1.62x (3.34x for senior lien bonds) from 1.58x (2.49x) the year prior. Net revenues fell somewhat, with expenditure growth of 11.1% (excluding depreciation) outpacing revenue growth of 2.4%. The decline in net revenues was more than offset by a reduction of debt service. Unaudited actual financial performance for fiscal 2015 remained sound despite quite modest deterioration of net revenues and other financial metrics. All-in DSCR fell to 1.57x (3.17x for senior lien bonds).

The port projects eventually issuing $64 million of PFC-backed debt, down significantly from $116 million the year prior, for its five-year $480 million capital improvement program. Fitch views the size of the projected issuance as modest and does not anticipate such an issuance to materially affect the port's credit quality.

Fitch's base case scenario through fiscal 2020 is based on projections provided by the port, which Fitch views as reasonable if not slightly conservative. Under these assumptions, total revenues and expenditures grow at unfavorable rates compared to their multi-year averages. Under this scenario the all-in DSCR remains at or above 1.40x in all years (senior coverage hovers above 3.00x in most years), CPE remains below $11.00, and all-in leverage tops out at 6.24x and declines thereafter.

Fitch's rating case assumes a hypothetical recessionary scenario with enplanement declines of 1.5% and 7% in fiscal years 2016 and 2017 followed by 2% growth thereafter. The scenario also assumes slower revenue growth than the base case scenario and accelerated expenditure growth. Under these assumptions the all-in DSCR falls to a low of 1.26x, averaging 1.33x through the forecast period. All-in leverage tops out at 6.36x in fiscal 2016 but declines thereafter due to principal amortization. CPE jumps up in fiscal years 2016 and 2017, and stabilizes near $12.75 thereafter. Fitch views the coverage and leverage levels produced under the rating case as consistent with the current rating level.