Fitch Rates Oakland, California’s $514.3MM Port Intermediate Lien Revs ‘A+’; Outlook to Negative

Fitch Ratings assigns a ‘A+’ rating to the Port of Oakland, California’s (the port) $514.3 million intermediate lien refunding revenue bonds series 2007 consisting of the following:

–$243,900,000 2007 series A (Alternative Minimum Tax [AMT]);

–$192,300,000 2007 series B (Non-AMT);

–$78,200,000 2007 series C (Non-AMT).

Fitch also affirms the ‘AA-’ on the port’s outstanding $952 million senior consolidated revenue bonds. The Rating Outlook on the intermediate lien bonds is Negative while the Outlook on the senior lien bonds is revised to Negative from Stable.

The bonds are scheduled for negotiated sale through a syndicate led by Citi on or about Oct. 16, 2007. Fitch expects the series 2007 bonds to be insured by a financial insurer whose financial strength is rated ‘AAA’ by Fitch Ratings.

The ‘AA-’ rating for the senior lien reflects the very strong competitive and economic position of the Port’s Aviation and Maritime Divisions, respectively, and as a consolidated entity. The Port of Oakland operates the 2nd largest airport in the San Francisco Bay Area and has grown its market share over the last decade to reach 7.2 million enplanements in fiscal 2006. In addition, the Maritime Division is recognized as the 4th largest container port in the nation handling 2.4 million TEUs in fiscal 2006. In this last decade these two business lines capitalized on the congestion issues of their nearest competitors at San Francisco International Airport (with respect to the Aviation Division) and the San Pedro Bay Ports Complex- including the Port of Los Angeles and Port of Long Beach- (with the respect to the Maritime Division). The strength of these two divisions has historically resulted in a strong debt service coverage ratio that has provided a great deal of security to senior lien bondholders.

The ‘A+’ rating on the intermediate lien reflects the subordinated legal pledge by Port of Oakland and its overall historically strong financial performance by the diverse and stable revenue sources of the Port. Strong operating fundamentals and traffic growth between fiscal 2002 and fiscal 2006 at the airport and seaport grew airport revenues at 5.9% on an average annual basis, to reach $134 million in fiscal 2006, and seaport revenues at 9.9% on an average annual basis, to reach $122 million that same year. The Port’s third revenue division, commercial real estate, has been restructuring its business model since fiscal 2002 and is assuming less risk on land development and intending to focus on improving its leases. As a result, the commercial real estate division’s operating revenues and operating expenses have declined on an average annual basis of 8.7% and 12%, respectively, between fiscal 2002 and 2006.

The Negative Outlook reflects increasing pressure on the port’s financial profile due to a large capital program and the expected need to develop a new terminal over the next 5 to 10 years. The port’s current capital program totals $1.5 billion, and if fully executed is likely to increase the port’s leverage and stress the port’s financial metrics, potentially making it more comparable to an operating entity in the ‘A’ rating category. In addition existing airport facilities are reaching capacity, driving a need for additional terminal infrastructure, for which the port is only at the early stages of planning. As development plans are solidified, Fitch will assess the financing plans for the new facility and their implications in regard to the port’s use of leverage and ability to maintain a healthy level of profitability and liquidity.

The 2007 Series bonds introduce a new lien in the Port of Oakland’s capital structure. Intermediate lien revenue bonds will be secured by a net revenue pledge subordinate to the gross lien pledge on the senior consolidated revenue bonds. The new lien structure creates additional debt capacity for large projects that include the rehabilitation and renovation of Terminal 1 at the Oakland International Airport (OIA or the airport), modernization and reconfiguration of Seaport terminal facilities and for the expansion of rail access to and from the Port.

Credit challenges for the Port of Oakland relate to its ability to maintain and improve its current level of profitability and liquidity levels. While the Port of Oakland’s consolidated operating ratio improved to 46% in fiscal 2006 up from 40% in fiscal 2002, its results are below those of comparable operating entities at this rating level. In addition, unrestricted cash as a percentage of debt has declined to 6.7% in fiscal 2006 from 9.6% in fiscal 2002. While much of the liquidity declines can be attributed to the numerous and costly security requirements following the events of Sept. 11, 2001, Fitch expects they will return closer to historic levels over time. Moreover, debt service coverage has improved over the 5-year period to reach 1.68 times (x) in fiscal 2006, up from 1.61x in 2002. While preliminary estimates of debt service coverage, on an all-in basis, are targeted at 1.40x through the forecast period, it is a target that has been historically lower than its pre-events of Sept. 11, 2001 coverage levels.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.