Moody’s affirms Port of Oakland’s A1 senior/A2 intermediate lien ratings; stable outlook
Moody’s Investors Service has confirmed the Port of Oakland’s A1 Main Lien and A2 Intermediate Lien ratings. The outlook is stable. The rating action affects approximately $640 million of outstanding debt.
The ratings reflect the port’s strong financial flexibility, with strong liquidity, comfortable debt service coverage, manageable capital expenditures and ample long-term debt capacity. Cash is at the highest level in over 10 years and is expected to increase further in fiscal 2023, providing excellent liquidity to manage potential near-term challenges. While cash is expected to be drawn down for capital spending through FY2027, the current CIP (FY2023-2027) does not involve additional debt and is not driven/pressured by expansion needs . This should provide flexibility – by financing through debt or by slowing/extending certain planned expenditures – to preserve liquidity if needed, while at the same time the port deleverages rapidly and all existing debt comes due in 11 years. .
The port benefits from favorable commercial diversity between port and airport operations, with strong cost recovery in both businesses supporting revenue stability in a volatile volume environment. The port’s expenses are predictable and its cost recovery model is strong, supported by high levels of MAG revenue in marine leases that extend beyond 2030. Although the seaport’s volume has underperformed recently , it remains stable and the associated income for the port increases. Airport activity is recovering well – better than other Bay Area airports – and should continue to normalize in line with the overall industry.
Key challenges include the risk of potentially large new debt for an airport capital project, which could arise in the latter part of the current PIC; expected reduction in cash over the next five years; and relatively low container volume. In our view, the strong financial position and ability to manage or mitigate throughput volatility positions the port well to manage these challenges and maintain stable credit metrics going forward, and to withstand economic or other pressures. contingencies that may arise.
The stable outlook reflects our expectation of a continued recovery in shipments and a stable or potentially modest decline in containers, the latter impact being mitigated by the high level of minimum contractual revenues from maritime customers. Favorable economic conditions in the Port’s markets should support near-term volumes, and the Port holds a record cash balance which provides strong liquidity. These factors combine to support our expectation of continued healthy financial performance, even with lower passenger levels in aviation, with mid-term DSCRs of 1.40x to 1.84x for the combined business as a whole.
FACTORS THAT CAN LEAD TO IMPROVED RATINGS
– Intermediate lien DSCR maintained above 1.75x for an extended period
– Continued debt reduction combined with maintaining 500 days of available cash
– Continued growth in boardings, coupled with maintaining a competitive cost-per-boarding (CPE) and low leverage prospectively, in the aviation division
FACTORS THAT MAY LEAD TO LOWER RATINGS
– Multi-year trend of declining boardings and/or reductions in air services
– Significant deterioration in DSCRs and liquidity of the combined business, with intermediate DSCRs below 1.40x for an extended period
The Senior Preferred Bonds, Intermediate Preferred Bonds and Subordinated Preferred Bonds are secured by a gross income pledge on a senior, intermediate and subordinated basis, respectively. PFCs, CFCs, and certain other amounts are specifically excluded from promised revenue. The rate covenant for first lien bonds is 1.25 x aggregate annual first lien debt service coverage by net revenues, and the additional bond test (ABT) is 1. 25x Maximum Annual First Lien Debt Service (MADS) based on net income for 12 consecutive years. months out of the 18 months immediately preceding. The senior preferred bonds are guaranteed by a common reserve fund, scaled to the average annual debt service and financed by cash.
The Intermediate Lien Rate Covenant is 1.10 times the aggregate annual Intermediate Lien and First Lien Debt Service Coverage by Net Revenues. The ABT is equal to 1.10x the coverage of the global MADS (intermediate and senior) using the net income of one of the 12 consecutive months over the immediately preceding 24 consecutive months. Intermediate senior bonds are backed by a pooled reserve fund, scaled to average annual debt service and funded by an investment grade bond and cash.
The Port of Oakland is an independent department of the City of Oakland (Aa1 stable), pursuant to the city charter. Exclusive control and management of port facilities was delegated to the council in 1927 by an amendment to the city charter.
Port facilities include Oakland International Airport (OAK; airport); marine terminals, rail facilities for intermodal and bulk cargo handling and areas for trucks, container storage, and marine support services (collectively, the Seaport); electrical substations, distribution lines, meters, and a mix of variable-term power contracts (collectively, utilities); commercial, industrial, recreational and other land leased or available for lease or sale; undeveloped land; and the water area (collectively, commercial real estate).
The seaport is the third largest in California and the 9th largest in the United States in terms of container volume, and the airport is the 5th largest in California and the third largest in the San Francisco Bay Area in Number of passengers.
The main methodology used in these ratings was the Public Managed Ports Methodology published in March 2022 and available on https://ratings.moodys.com/api/rmc-documents/385575. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.