Fitch Affirms Port of Seattle, WA Rev Bonds at 'AA/A+/A' and PFC Bonds at 'A'; Outlook Stable

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the following Fitch-rated outstanding Port of Seattle bonds:

--$848.265 million in first lien revenue bonds at 'AA';

--$1.477 billion in intermediate lien revenue bonds at 'A+';

--$165.085 million in subordinate lien revenue bonds at 'A';

--$157.15 million in passenger facility charge (PFC) revenue bonds at 'A'.

The Rating Outlook is Stable for all bonds.

KEY RATING DRIVERS

--Strong Asset Base: The Port of Seattle (Port) operates Seattle-Tacoma International Airport (Sea-TAC), the primary regional air passenger service provider with a virtual monopoly in the Seattle area (73% origination and destination). Its seaport is one of the nation's largest container ports, although it operates 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-Volume: Strong.

--Diverse Revenue Base: The port has large and diverse revenue streams between and within its airport, seaport, and real estate divisions, including tax levy revenues that are assessed over the Port District that is co-terminus with King County. The airport division contributes nearly 74% of total operating revenues while the seaport division generates 20%. The airline use agreement expired at the end of 2012 however the existing hybrid rate setting approach is carrying into fiscal 2013. Revenue Risk-Price: Mid-range.

--Conservative Debt Structure: Approximately 91% of the Port's debt is in fixed rate mode. Structural features are sound. Debt Structure: Stronger.

--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 2.7 times (x), 1.8x, and 1.5x in 2012. Leverage, as represented by net debt to cash flow available for debt service (CFADS), is moderate at 6.9x while debt per enplanement is somewhat higher than average at $181, respectively. Cost per enplanement (CPE) was above average compared to other large-hub airports in 2012 at $13.16, though management expects CPE to steadily rise to $16.14 by 2017. Debt Service Counterparty Risk: Mid-range.

--Large Scale Capital Program with Future Borrowings: The port contemplates a sizable $1.6 billion capital program through 2017. Financial flexibility could be strained if most or all of the contemplated $766 million 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. Infrastructure Development/ Renewal: Stronger.

--PFC Bonds Have a Narrow Revenue Stream but Strong Legal Covenants and Metrics: A substantial overall air traffic market supports large annual PFC collections. At current PFC leverage, fiscal 2012 PFC collections provide very strong coverage of 3.1x maximum annual debt service (MADS).

RATING SENSITIVITIES

--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.

--Significant increases in the port's operating costs, notable declines in annual port and aviation sector revenues, or a weakened cost recovery framework in the next airline lease and use agreement could weaken credit quality.

--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.

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 9% in outstanding variable rate debt and has a policy to have no more than 25% outstanding.

CREDIT UPDATE

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 growth of 1%, 4%, and 1.2% recorded in 2010, 2011, and 2012, respectively. For the first four months of 2013, enplanements are up 3.4% from the same period last year which is ahead of the Port's projection of 2.2% projected for the full year. The airport enjoys a strong O&D base (approximately 73%) and its domestic travelers comprised 90% of enplanements in 2012. The airport's cost per enplaned passenger rose in 2012 to $13.16 from $11.76 in 2011 and is somewhat above those of other large hub airports. CPE is expected to increase to over $16 as approximately $762 million in additional debt is issued over the next five years.

Seaport container traffic exhibited strong growth of 35% in 2010 and has recorded declines of 5% and 8.1% for 2011 and 2012, respectively. Container traffic continues to be weak through the first quarter of 2013. The declining container traffic has had an impact on the seaport's financials to a much lesser degree than otherwise expected because the port's lease structure for marine terminals is based on a per-acre rate (which were readjusted every five years) rather than on volume. Going forward, leases are based on volume with per-acre minimum annual guarantees (MAG) that feature inflationary adjustments, and the Port's financial projections reflect only the MAG amounts. The lease at Terminal 46, which was due to expire in 2015, was extended through 2025, though at a rate lower than that previously charged.

The airport comprises the largest percentage of total operating revenues for the port at nearly 74%, followed by the seaport at 20%, and the real estate division comprising the remainder. From 2002 - 2012, the airport's operating revenues outperformed expenses with a compound annual growth rate (CAGR) of 5.8% and 3.8%, respectively. During the same period, the seaport's operating revenues grew at a 1.6% CAGR but expenses declined at a 6.1% CAGR. The real estate division was created in 2008 and its revenues declined at a 2.6% CAGR through 2012 while expenses dropped at a 3% CAGR over the same period. Total operating revenues grew 8% in 2012 and total operating expenses grew at a somewhat higher 11.5% rate, due in part to the opening of a new consolidated rental car facility in May 2012. Through the first quarter of 2013, operating revenues are $10.8 million below port expectations while operating expenses are $11.8 million below expectations. The port's liquidity at the end of 2012 was somewhat below peers at 133 days cash on hand; however, the port has a policy of maintaining nine months of operating expenses in its operating fund balance and at the end of 2012 held approximately twice that rate.

PFC revenues for fiscal 2012, generated by the $4.50 fee assessed on passengers, resulted in DSCR of 3.3x. MADS coverage based on 2012 PFC revenues (without interest earnings) was similarly strong at 3.1x. Based on the airport's traffic and PFC collection forecast, coverage levels on this lien are mainly expected to remain above 3x 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 2.69x in 2012, up from 2.17x in 2011. Intermediate lien coverage of 1.77x was relatively unchanged from the 2011 level. Meanwhile coverage of all obligations (essentially subordinate lien coverage) was 1.53x in 2012, in line with the 2011 level.

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Nov. 27, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793727

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Contact:
Fitch Ratings
Primary Analyst
Kenneth T. Weinstein, +1-212-908-0571
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Emma Griffith, +1-212-908-9124
Director
or
Committee Chairperson
Seth Lehman, +1-212-908-0755
Senior Director
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