OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to $175 million in Port of Seattle, WA (the port) First Lien Revenue Refunding Bonds, Series 2016 A-C. Fitch has also assigned an 'A+' rating to $125 million in Intermediate Lien Revenue Refunding Bonds Series 2016.

Fitch has also affirmed the ratings for the following bonds:

--$630 million in first lien revenue bonds at 'AA';

--$1.7 billion in intermediate lien revenue bonds at 'A+';

--$128 million in subordinate lien revenue bonds at 'A';

--$123 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 4.5x, while intermediate and subordinate lien coverage is also strong in the 1.6x 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 as debt amortizes. The credit compares favorably to consolidated peers with port and airport operations including Massport and Oakland, with lower CPE levels and comparable leverage.

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 (70% origination and destination for FY 2015). Delta's (Delta Air Lines rated 'BBB-'/Stable Outlook) expansion at the airport, as well as competitive responses from Alaska (Alaska Air Group, rated 'BBB-'/Negative Watch) and other carriers, has enabled a faster pace of traffic growth in recent years, with 2015 enplanements up 12.8% and international enplanements up 14.4%. The Northwest Seaport Alliance between the Ports of Seattle and Tacoma, which had its financial start in January 2016, 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 roughly 76% of 2015 total operating revenues while other businesses generated 24% of revenues; included in this are businesses licenced to the seaport alliance, which generated 12% 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 $2.4 billion capital program for 2016 through 2020 with 86% of the capital budget focused on aviation. Financial flexibility could be strained if most or all of the contemplated $1.21 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 (Sr); Midrange (Intermediate and Sub)

Conservative Debt Structure: 89% 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 Coverage, Moderate Leverage: The port's debt service coverage ratios (DSCRs) have historically been healthy with senior, intermediate, and all-in coverage of 4.6x, 1.7x, and 1.6x in 2015. 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 6.3x. Debt per O&D enplanement is higher than average at $138. Cost per enplanement (CPE) was above average vs. large-hub airports in 2015 at $10.12, though this represents a drop from 2014. Management expects CPE to rise to $12.91 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 2015 PFC collections provide very strong coverage of 3.9x maximum annual debt service (MADS).

Peer Analysis: Port of Seattle compares favourably to other consolidated entities with airport and port operations, such as Massport (rated 'AA') 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.

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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 2016 First Lien bonds, series A, B, and C, are being issued to refund outstanding Series 2007A and 2007B First Lien Revenue Bonds for estimated NPV savings of $27 million, or 15.3%. The refunding will also eliminate a related Ambac surety policy, replacing it with a cash funded DSRF. The Series 2016 Intermediate Lien Revenue Refunding Bonds will current refund all outstanding Series 2006 Intermediate Lien Bonds for estimated NPV savings of $25 million, or 20.4%. The refunding will result in level savings with no extension of final maturity.

Historical traffic resilience is evidenced by enplanement declines in only three years since 1998, most recently in 2009 at 3% during the recession. Enplanements have grown annually since, with robust growth of 12.8% in 2015. For the first five months of 2016, enplanements are up a further 9.9% from the same period last year, above management's expectation of 5.2%. Delta's continued 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 (70% in 2015) and its domestic travelers comprised 90% of enplanements in 2015. The airport's CPE fell in 2015 to $10.12 from $11.48 in 2014, somewhat above those of other large hub airports. Management expects CPE to increase to $12.91 by 2020 as approximately $1.2 billion in additional debt is issued over the next five years in the context of the port's capital program.

Non-airport activities have also seen growth in 2015. Grain volumes have rebounded from the 2012 - 2013 drought, with 2014 volumes up 168% and 2015 up 4.4%. Cruise passengers were also up 9.0% in 2015, following a 5.4% decline in 2014. Vessel calls were also up 7.3%. Growth is largely from the use of larger vessels at higher capacity. The Port expects another strong year in 2016, with passenger volume forecasts up 6.9% due to larger cruise ships. All container shipping operations have now been transferred to the Seaport Alliance. Seaport Alliance volumes grew 4.0% in 2015, consistent with overall growth at North American ports, but over the past five years, NWSA volumes (measured as the total of Seattle and Tacoma) have been flat compared to 14.5% growth in North America as a whole and particularly strong growth on the East and Gulf Coasts.

The airport comprises the largest percentage of total operating revenues for the port at 76%, while other businesses generated 24% of revenues; the latter figure includes facilities licensed to the seaport alliance, which generated 12% of revenues. Operating revenues increased 4.6% in fiscal 2015, reflecting increases in non-aero revenues at the airport from increased passenger volumes, driving parking and dining/retail growth. The seaport division also saw increased from higher cruise revenues from increased passenger volumes and rate increases, together with improving grain volumes and contracted rates. For the first quarter of fiscal 2016, operating revenues are 3.3% above the same period a year prior, and 2.3% better than budget.

PFC revenues for fiscal 2015, generated by the $4.50 fee assessed on passengers, resulted in DSCR of 4.2x. MADS coverage based on 2015 PFC revenues (without interest earnings) was similarly strong at 3.9x. 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 4.57x in 2015, up from 4.20x in 2014. Intermediate lien coverage of 1.68x was above the 2014 level. Meanwhile coverage of all obligations (essentially subordinate lien coverage) was 1.63x in 2015, higher than coverage seen in the last five years.

Looking forward, Fitch's base case scenario considers enplanement growth of 2.6% on average through 2020, resulting in airport revenue growth of 5.7%, and slightly declining revenues for other port businesses, resulting in overall average revenue growth of 4.2% through 2020. The base case assumes 3.3% expense growth, as well as implementation of the full borrowing plan, resulting in average coverages of 5.14x, 1.63x, and 1.36x on the senior, intermediate, and subordinate liens respectively. CPE rises to a high of $12.91 by 2020. All in leverage rises with the borrowing plan, but falls to 5.3x net debt to CFADS by 2020.

Under Fitch's more conservative rating case, which considers a 5% drop in enplanements at the airport and a 2% decline for other port businesses coupled with slow recoveries from these dips and higher annual expense growth, average coverages are still robust and well above covenant levels at 4.65x, 1.50x, and 1.25x on the senior, intermediate, and subordinate liens respectively. CPE rises to a high of $14.40 under this scenario, but still compares relatively favorably to peers. Leverage is a manageable 5.9x by 2020.

On Aug. 4, 2015, the Ports of Seattle and Tacoma jointly formed the Northwest Seaport Alliance to manage all of the two ports' container terminals as well as certain industrial properties. Both ports face significant competition for container shipping business, and formed the Seaport Alliance in an effort to improve their competitive position. The purpose of the Seaport Alliance is to coordinate customer relationships, improve capacity utilization between the two ports, eliminate pricing competition between the ports by creating a unified gateway, and rationalize strategic capital investments at both ports. The Seaport Alliance ranked 5th in TEU volume in the US for 2015, behind LA, Long Beach, NY/NJ, and Savannah.

The Seaport Alliance was formed as a Port Development Authority (PDA) - a jointly owned, governmental entity, but each port retains 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, and employs joint venture accounting (50%/50% split between partners), with funds flowing back at least quarterly. The ports contribute to capital construction subject to Managing Member approval. Joint financial reporting began Jan. 1, 2016. Thus far, each port has contributed funds for working capital, working capital reserves, and capital construction. Q1 2016 operating income of $30 million is 17% over budget.

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 11% in outstanding variable rate debt and has a policy to have no more than 25% outstanding.