NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA' rating to the Harbor Department of the City of Los Angeles (Port of Los Angeles), California $343.8 million revenue bonds series 2014A, 2014B, and 2014C. In addition, Fitch has affirmed the 'AA' rating for approximately $764.5 million in parity revenue bonds. The Rating Outlook for all the bonds is Stable.
KEY RATING DRIVERS
Revenue Risk -Volume: Stronger
Very Strong Market Position: POLA is the nation's largest container port and, when combined with the Port of Long Beach, the two constitute the San Pedro Bay Port Complex; the fifth largest port complex in the world. Following the downturn in maritime trade during the recession, POLA has experienced a steady return in cargo volumes. Exposure to volatile international trade is a risk to throughput levels and trade is largely dependent on Far East imports.
Revenue Risk -Price: Stronger
Resilient Revenue Stream Despite Exposure to International Trade: With a large majority of operating revenues coming from the container business, the port is exposed to fluctuations in international trade as evidenced by shrinking trade volumes over the recent recession due to overall weakness in the global economy, fuel cost volatility and US Dollar values. Long-term guaranteed contracts with most tenants mitigate cargo volume risk. Over the next five years, the port estimates annual minimal lease revenues in the $300 million range.
Infrastructure Development/Renewal: Stronger
Flexible Capital Program: The port's capital program is modestly sized at $1.27 billion with future debt requirements that will not materially dilute coverage. The port's terminal facilities are modern and contiguous, and have excellent access to intermodal transportation facilities. The port maintains strong debt service coverage levels, and has an internal policy to manage leverage in order to maintain a minimum of 2.0x net revenue coverage.
Debt Structure: Stronger
Conservative Debt Structure: All of the port's outstanding bonds are fixed rate obligations with stable annual debt service requirements. Covenants and reserve requirements are in-line with highly rated U.S. port credits.
Debt Service & Counterparty
Strong Financial Profile: The port benefits from a strong balance sheet and high coverage ratios highlighted by preliminary FY2014 unrestricted reserves of $266 million and debt service coverage of 3.67x. Port leverage is also very low with a 2.35x net debt/cash flow available for debt service ratio. The port's financial position is further supported by stable revenue sources through long-term lease agreements with most tenants. Minimum annual lease payments represent approximately over 60% of total operating revenues.
Negative - Operational Underperformance: Substantial changes in container tonnage or a marked shift in the diversity of revenue sources supporting the port;
Negative - Metrics and Leverage: A sustained reduction in debt service coverage ratios falling below the 2.0x range or divergence from current leverage levels due to changes in the port's cost structure and scope of capital plan.
PEERS: Amongst its peers in the 'AA' rating category, such as Port of Long Beach (CA), POLA demonstrates comparably strong cargo activity and robust coverage metrics. Leverage for both ports is also consistent with the 'AA' rating category.
The series 2014 bonds will be divided into three components: 2014 series A (AMT) to fund non-governmental projects and refund the outstanding series 2006D bonds, 2014 series B (Non-AMT) to refund outstanding commercial paper, and 2014 series C to fund new money governmental projects. All of the bonds are expected to be issued in fixed rate mode with an overall final maturity in 2045.
Following a period of trade volume contraction during the most recent recession, port activity has since shown signs of steady improvement. Container units (20-foot equivalent units or TEUs) rose to 8.2 million in fiscal 2014, which is 5.5% higher than the previous year. As considered in the POLA rating, the severity of downside volume risk experienced in the most recent period was largely mitigated by the strength of POLA's lease terms, which generally feature minimum revenue guarantees. A majority of the port's tenants are operating under long-term lease contracts that collectively contain minimum payment provisions that can cover annual debt service requirements on the outstanding debt. Management has indicated that key tenants desire to maintain or increase long-term operations at POLA.
One long-term risk is the fact that discretionary cargo is a key component of POLA's shipping activity, representing nearly half of shipping volumes in recent years. While POLA is well positioned in terms of both portside and inter-modal infrastructure to accommodate cargo destined for local demands as well as flow-through to the Midwestern and central United States, cargo leakage to other maritime facilities will be an ongoing and perhaps increasing risk factor as the Panama Canal expansion project reaches completion in less than two years. Fitch has assessed some stresses to port activity and views the financial cushion to be very strong to manage the potential for some diversion of maritime activity.
Historical financial performance at POLA chas remained strong despite the volatility of maritime trade. Preliminary and unaudited fiscal 2014 debt service coverage was 3.67x reflecting an improvement from 2.93x in the previous year. The coverage improvement was based on a 5.5% gain in container volumes and rising shipping rates. Minimum annual guarantees from port tenants provided for over $280 million in 2014, accounting for nearly 66% of total port revenues and providing over 1.0x debt service coverage alone on a net revenue basis. Based on existing debt, estimated debt service coverage remains very strong at or above 2.0x. Cash reserves are also robust with over $266 million in unrestricted funds which translate to 468 days cash on hand.
The port maintains prudent financial practices including a target of minimum 2.0x coverage on its revenue bonds as well as maintaining a high level of minimum available reserves. Further, the port's updated financial exposure to Alameda Corridor Transportation Authority (ACTA) appears to be minimal given both ACTA's recent debt restructuring plan and POLA's strong cash flow and liquidity position.
The port's capital improvement plan is moderate in nature at just under $1.3 billion through 2018. Capital spending is geared towards several terminal development and community enhancement projects. The terminal projects for tenants such as China Shipping, TraPac and the World Cruise Center should increase capacity to meet future growth and lead to growth in port operating revenues. Incremental future debt is expected to be less than 20% of the entire capital program while cash from operations and port fund balances together are much of the funding resources. Given the modest future leverage and high fund balances in place, the port leverage that is currently 2.3x net debt/CFADS will likely remain below 3.0x under Fitch's rating case of limited cargo growth and some potential diversion of cargo once the Panama Canal expansion has been completed. Fitch views this leverage position to be low when compared to other major U.S. ports.
All harbor department revenue bonds are secured by senior lien on revenues of the port.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Ports' (Oct. 3, 2013);
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Ports
Rating Criteria for Infrastructure and Project Finance