Fitch Rates Port of Long Beach, CA's Harbor TIFIA Loan 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the Port of Long Beach's $325 million TIFIA loan agreement, issued by the city of Long Beach, California for the Gerald Desmond Bridge Project. The Rating Outlook is Stable.

Fitch also maintains ratings on the Port of Long Beach's outstanding senior lien harbor revenue and refunding bonds, which are rated 'AA' with a Stable Outlook. For more information on Fitch's view of outstanding senior lien obligations, please see 'Fitch Affirms Port of Long Beach, CA's Harbor & Rfdg Revs at 'AA'; Outlook Stable' dated April 2, 2014, and 'Fitch Rates Port of Long Beach, CA's Harbor & Rfdg Revs and Rev Notes at 'AA'; Outlook Stable' dated April 15, 2014. Both reports are available at www.fitchratings.com.

The rating on the TIFIA loan reflects the subordinate claim on gross revenues, together with the port's strong market position as the second largest U.S. container port, with resilient revenues stabilized by long-term contractual guarantees that are sufficient to cover both the port's outstanding senior debt obligations and the subordinate TIFIA loan. Going forward, contractual guarantees are expected to continue to provide revenue stability as the port proceeds with expected future borrowing for its sizable long-term capital improvement plan (CIP). This plan, while costly, will help ensure the port's competitive position going forward. Strong financial metrics and considerable liquidity expected throughout execution of the CIP help support the port's rating.

KEY RATING DRIVERS

Strong Market Position: The Port of Long Beach is the nation's second largest container port, located on the west coast. When combined with the Port of Los Angeles, the two constitute the San Pedro Bay Port Complex and are the seventh largest port complex in the world. Fiscal 2013 20-foot equivalent units (TEUs) were 6.7 million, a 13.5% increase over 2012 but still 8% below fiscal 2007 peak levels. Revenue Risk - Volume: Stronger

Resilient Revenue Stream Despite Exposure to Volatility: With a large majority of operating revenues coming from the container business, the port is exposed to fluctuations in international trade and growing competitive pressures, which can lead to volume volatility. However, the port's revenues are largely insulated from trade-related volatility due to long-term guaranteed contracts with most tenants, covering nearly 70% of operating revenues. Revenue Risk - Price: Stronger

Modern Facilities, Sizable Capital Program: The port's capital program through 2023 is sizable at approximately $4 billion. Additional borrowing of $1.6 billion is anticipated as part of the capital program, with 80% anticipated in the next five years. Careful management of the plan's scope and cost relative to business demand so as to maintain the port's very strong financial profile is important. The port's terminal facilities are modern and contiguous, and the port benefits from favorable rail and highway connections within the LA region and to external markets through the Alameda Corridor. Infrastructure Development/Renewal: Midrange

Debt Structure: The port's senior bonds are all fixed rate and benefit from strong covenants. The subordinate TIFIA loan is also fixed rate, and benefits from a fixed amortization profile with any changes subject to approval by the TIFIA lender. The port's board has passed an ordinance requiring management to a minimum of 2.0x net debt service coverage ratio (DSCR) (which applies to both senior and the subordinate TIFIA loan) and 600 days cash on hand, which serve to protect bondholders as additional leverage for the CIP is brought online. Debt Structure (Senior): Stronger. Debt Structure (Subordinate): Midrange

Excellent Financial Profile: The port has a healthy balance sheet with a strong liquidity position, albeit lower than previous years due to use of cash for the ongoing CIP. 2013 liquidity of $240 million represents 896 days cash on hand. Senior debt service coverage has remained above 3.0x since 2011, and is projected to remain at or above 2.0x through the forecast period for both senior and subordinate obligations, including the TIFIA loan. 2013 port leverage is low at 1.2x net debt/cashflow available for debt service (CFADS) on senior obligations (1.5x when balances on revolving lines of credit are included, and 2.7x when $325 million is included for the TIFIA loan), though this is expected to rise to the 4x - 5x range as the full capital plan is executed.

RATING SENSITIVITIES

--Higher than anticipated volatility or a steady downward trend in port container volumes;

--Financial forecasts indicating all-in (senior and subordinate) debt service coverage levels falling below the 2.0x management policy;

--Upward revisions to the capital program or debt funding that could indicate weaker debt metrics or measurably reduce port liquidity.

SECURITY

The TIFIA loan is secured by a first lien on the port's subordinate revenues, or gross revenues of the port remaining after the payment of debt service on senior bonds and other senior obligations and the funding of any debt service reserve funds established for the senior bonds and other senior obligations.

TRANSACTION SUMMARY

The port is seeking a direct TIFIA loan in the amount of $325 million to reimburse costs incurred in the replacement of the Gerald Desmond Bridge (the 'bridge'). The TIFIA loan will cover 25% of approximately $1.2 billion in costs associated with the bridge replacement project. The port does not intend to issue any additional public debt in support of the project, and the TIFIA loan is primarily being sought to lower overall project borrowing costs.

The TIFIA loan is subordinate to the port's existing senior debt. The interest rate on the TIFIA loan will be set at financial close, and the loan may not be disbursed until substantial completion has been achieved. The port anticipates drawing the loan within 12 months after substantial completion. The subordinate TIFIA loan is fixed rate, and benefits from a fixed amortization profile through fiscal 2052, with any changes subject to approval by the TIFIA lender. Two ratings of 'A-' or the equivalent on the TIFIA loan are required as condition precedent to the loan. Additionally, while the revolving lines of credit with Bank of America and Union Bank remain outstanding, a downgrade of senior obligations below 'A-' by two rating agencies constitutes an event of default under the loan agreement. Fitch views other events of default as typical for a TIFIA loan, though notes that there is no springing lien provision given the high rating of the port.

The TIFIA loan benefits from strong rate covenants, including 1.1x MADS on a gross basis, 1.0x on a net basis, and the requirement that subordinate revenues are sufficient to pay the sum of senior and subordinate debt obligations; required deposits to debt service reserves; and O&M expenses. Additionally, the port must notify TIFIA if coverage falls below 1.5x, providing an additional level of protection. If coverage falls below 1.25x, the port must fund a separate reserve for the TIFIA loan, equal to the least of 10% TIFIA principal; TIFIA MADS; and 1.25x TIFIA AADS. If the port is not maintaining reserves for any other bonds, the TIFIA reserve must equal the greatest semi-annual TIFIA debt service due on or prior to the earlier of the 10th anniversary of that determination date or final maturity. In addition to additional bonds tests of 1.1x gross and 1.0x net MADS coverage, borrowing for a permitted special facility requires 2.0x net coverage. While the pledge to the TIFIA loan is junior to that of the senior bonds, Fitch views the covenant package as strong, and feels these protections are adequate to achieve an 'AA-' rating, which is one notch off the senior bonds at 'AA'.

Located at the southern terminus of I-710, the bridge serves as a primary link between the two San Pedro Bay ports and warehouses and rail yards north of the ports, in the surrounding communities of East Los Angeles, Commerce, and Vernon. The Gerald Desmond is one of three bridges connecting surface highways to Terminal Island and providing connection between the cities of Long Beach and Los Angeles. The existing five-lane bridge is a physically deteriorated structure constructed in 1968. The new six-lane bridge has a planned 100-year design life, and will enable the port to accommodate projected increases in vehicular traffic on the bridge and commercial growth in the port, and allow for the increased size in container ships expected in the future.

Container volumes at Long Beach have improved since the recession, with 2013 showing a healthy increase in throughput of 13.5%. The overall trend in TEUs remains one of growth, with the 2002 - 2013 CAGR at 2.5%. The first seven months of fiscal 2014 have seen a further increase, with year to date TEUs through April up 2.8% over the previous year. In fiscal 2013, the port's total operating revenues were $346 million, a 3.7% increase over 2012. For the first three months of fiscal 2014, operating revenues are 2.6% above the same period in 2013.

Declines and recoveries in volumes have had limited impact on the port's rating, largely due to the revenue stabilizing nature of the port's long-term leases with its largest tenants. These long-term lease contracts collectively contain minimum payment provisions that are more than sufficient to cover both the port's outstanding senior debt obligations and the subordinate TIFIA loan. Going forward, contractual guarantees are expected to continue to provide revenue stability as the port proceeds with expected future borrowing for its sizable long-term capital improvement plan (CIP). Management has indicated that key tenants desire to maintain long-term operations at the port, with tenants already secured for the middle-harbor project.

The port's top 20 tenants accounted for over 90% of port operating revenues in fiscal 2013, and contractual minimum revenue guarantees accounted for $236 million (68% of operating revenues), sufficient to cover senior debt service obligations 1.7x (net of operating expenses). From fiscal 2014 onwards, minimum guarantees increase to $265 million or higher, reflecting guarantees relating to the middle harbor project, and over the next five years are expected to provide 1.5x or higher net coverage of debt service obligations, including the subordinate TIFIA loan.

Historically the port has maintained high debt service coverage levels, with net coverage at or above 3.0x both prior to the recession and since fiscal 2011. Coverage remains well above the rate covenant of 1.25x gross coverage. Cash reserves are robust with $240 million in unrestricted funds which translates to 896 days cash on hand. The port manages to a minimum of 2.0x net coverage and 600 days cash on hand, per an ordinance by the Board of Harbor Commissioners in October 2011. Fitch views this policy as providing liquidity stability for bondholders, and sees continued management to these levels as important to maintenance of credit quality. Fitch notes that potential contingent liabilities to ACTA for debt payments, although none are currently projected, are legally subordinate to port revenue bonds.

Both San Pedro Bay ports (Los Angeles and Long Beach) are well-positioned in terms of both portside and inter-modal infrastructure, allowing them to accommodate both local and non-local shipments. However, with 50% of cargo destined for inland markets, competition for this cargo may increase as the Panama Canal expansion project reaches completion in 2016. Under various scenarios that contemplate drops in cargo volumes due to diversion or other events; funding of the full capital plan with an additional $1.6 billion of debt obligations per management's projections; and careful management of operating and capital expenditures, forecasted debt service coverage levels for both senior and subordinate TIFIA obligations are expected to remain in excess of 2.0x in a base case scenario, and 1.6x or better in a combined downside case scenario. Should volume stagnate or should the port fail to manage its expense profile prudently, the port may need to delay or defer certain elements of the capital program in order to maintain these coverage levels. Failure to maintain coverage above 2.0x in keeping with the port's debt ordinance will jeopardize the current rating.

The port's CIP through 2023 totals approximately $4 billion, with projects including the middle-harbor redevelopment project, and the modernization of Pier G, in addition to the replacement of the Gerald Desmond Bridge. While the current plan anticipates issuing $1.6 billion for these projects ($1.3 billion over the next five years), which includes the subordinate TIFIA loan, management indicates that timing is flexible for several of the projects, and projects may be deferred or scaled down should market conditions change. While costly, the CIP improvements will help the port maintain its competitive position and service newer, larger ships. Fitch will be monitoring whether upcoming leadership changes at the port could impact the scope, prioritization, and timetable for infrastructure renewals.

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 Ports' (Oct. 3, 2013).

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 Ports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719985

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830989

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Contacts

Fitch Ratings
Primary Analyst
Emma Griffith
Director
+1-212-908-9124
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Emma Griffith
Director
+1-212-908-9124
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com