Moody’s Investors Service has affirmed the Port of Oakland’s A1 senior lien and A2 intermediate lien ratings. The outlook is stable. The rating action affects approximately $640 million of outstanding debt.
RATINGS RATIONALE
The ratings reflect the port’s strong financial flexibility, with robust liquidity, comfortable debt service coverage, manageable capital spending and significant long term debt capacity. Cash is at the highest level in more than 10 years, and is expected to build further in FY 2023, providing excellent liquidity to manage potential near-term challenges. While cash is expected to be drawn down for capital spending through FY 2027, the current CIP (FY 2023-2027) does not entail additional debt and is not motivated/pressured by expansion needs. This should provide flexibility — by debt financing or slowing/extending some planned spending — to preserve liquidity if needed, while at the same time the port is rapidly deleveraging and all existing debt matures within 11 years.
The port benefits from favorable business diversity between seaport and airport operations, with strong cost recovery in both enterprises that supports revenue stability amid volatility in volume. The port’s expenses are predictable and its cost-recovery model is sound, supported by high levels of MAG revenues in maritime under leases that extend beyond 2030. While seaport volume has underperformed recently, it remains stable and related revenues for the port are growing. Airport activity is recovering well — better than other Bay Area airports — and should continue to normalize in line with the broader sector.
Key challenges include risk around potentially significant new debt for an airport capital project, which could occur in the latter part of the current CIP; the planned reduction of cash over the next five years; and relative weakness in container volume. In our view, the strong financial position and ability to manage or mitigate throughput volatility position the port well to manage these challenges and maintain stable credit metrics going forward, and to withstand unexpected economic or other pressures that may arise.
RATING OUTLOOK
The stable outlook reflects our expectation of continued recovery in enplanements and stable or potentially modest declines in containers, with the latter impact mitigated by the high level of contractual minimum revenue from maritime customers. Favorable economic conditions in the port’s markets should underpin near-term volumes, and the port holds a record-high cash balance that provides robust liquidity. These factors combine to support our expectation of continued healthy financial performance, even with lower passenger levels in aviation, with medium-term DSCRs of 1.40x to 1.84x for the combined enterprise as a whole.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
– Intermediate lien DSCRs maintained above 1.75x for a sustained period
– Continued deleveraging combined with the maintenance of 500 days cash on hand
– Continued enplanement growth, coupled with the prospective maintenance of a competitive cost per enplanement (CPE) and low leverage, in the aviation division
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
– Multi-year trend of enplanement declines and or air service reductions
– Significant deterioration in DSCRs and liquidity for the combined enterprise, with intermediate DSCRs below 1.40x for a sustained period
LEGAL SECURITY
The senior lien bonds, intermediate lien bonds and subordinate lien obligations are secured by a pledge of gross revenues on a senior, intermediate and subordinate basis, respectively. PFCs, CFCs, and certain other amounts are specifically excluded from pledged revenues. The rate covenant for the senior lien bonds is 1.25x aggregate annual senior lien debt service coverage by net revenues, and the additional bonds test (ABT) is 1.25x maximum annual senior lien debt service (MADS) based on net revenues for any 12 consecutive months out of the 18 months immediately preceding. The senior lien bonds are secured by a common reserve fund, sized at average annual debt service and funded with cash.
The intermediate lien rate covenant is 1.10x coverage of aggregate annual intermediate lien and senior lien debt service by net revenues. The ABT is equal to 1.10x coverage of aggregate MADS (intermediate and senior) using net revenues from any of the 12 consecutive months out of the 24 consecutive months immediately preceding. The intermediate lien bonds are secured by a common reserve fund, sized at average annual debt service and funded with an investment grade surety and cash.
PROFILE
The Port of Oakland is an independent department of the City of Oakland (Aa1 stable), per the city charter. Exclusive control and management of port facilities were delegated to the board 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 truck staging, container storage and maritime support services (collectively, the Seaport); electrical substations, distribution lines, meters, and a mixture of varying duration energy contracts (collectively, Utilities); commercial, industrial, recreational, and other land under lease or available for lease or sale; undeveloped land; and water area (collectively, Commercial Real Estate).
The seaport is the third largest in California and the 9th largest in the US by container volume, and the airport is the 5th largest in California and the third largest in the San Francisco Bay Area by passenger volume.
METHODOLOGY
The principal methodology used in these ratings was Publicly Managed Ports Methodology published in March 2022 and available at https://ratings.moodys.com/api/rmc-documents/385575. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Source: Moody’s