NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the Harbor Department of Los Angeles, California's (Port of Los Angeles, or POLA) $38.7 million refunding revenue bonds series 2015 A (Non-AMT). In addition, Fitch has affirmed the 'AA' rating for approximately $965.4 million of parity revenue bonds. The Rating Outlook is Stable.
The 'AA' rating reflects POLA's leading market position, with stable revenues underpinned by long-term contractual guarantees adequate to cover most outstanding senior debt service. Strong financial metrics and considerable liquidity expected throughout execution of the manageably sized CIP further support the rating. Although management does not expect to issue long-term debt to fund its CIP, the port may draw from its commercial paper (CP) program.
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 10th largest port complex in the world. POLA has experienced a steady return in cargo volumes following the recession led downturn in maritime trade. Going forward, there is ongoing exposure to volatile international trade as well as labor risks, and throughput levels remain largely dependent on Far East imports.
Revenue Risk -Price: Stronger
Resilient Revenue Stream: A large majority of operating revenues are derived from the container business; however, long-term leases with minimum payment levels to most key 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 $803 million with no long-term debt issuances planned. 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, though the port may also utilize a portion of its $200 million CP program to fund its CIP. Covenants and reserve requirements are in-line with highly rated U.S. port credits.
Strong Financial Profile: The port benefits from a strong balance sheet and high coverage ratios highlighted by FY2015 unrestricted reserves of $436 million and debt service coverage of 3.84x. Port leverage is also very low with a 1.9x 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 are projected to make up at least 60% of total operating revenues through fiscal 2020.
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.
Positive - Given the port's already strong profile and rating level, upward rating action is unlikely.
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 2015A bonds will refund outstanding revenue bonds for estimated net present value savings of $6.3 million. The bonds are being issued as fixed rate and mature in 2026.
POLA is the nation's largest container port, and operational performance remains healthy with a solid recovery since the previous recession period. Container volumes were nearly 8.2 million TEUs (20-equivalent units) in fiscal 2015, reflecting a slight decline of 0.2% taking into account both expanding economic activity as well as the offset by labor unrest at the start of 2015 (for more information on the labor slowdown see 'Fitch: West Coast Labor Seesaw Leaves Reliability Question' dated Feb. 24, 2015). Import cargo from Asia, particularly China, drives a substantial portion of the overall volumes.
Volume risks in the near term are focused on several areas including the economies in China and the U.S., the impacts from the recent unrest where some shippers have diverted discretionary cargo to other ports, and the eventual opening of the expanded Panama Canal. Still, container volumes are resilient over the longer term and management currently anticipates 2% container growth in fiscal 2016 followed by 3% growth thereafter. Fitch views management's projections as reasonable given expectations of further economic growth and several strategic measures management is pursing to further enhance the port's already competitive position. Still, aforementioned macro factors could affect the ability to meet these growth targets.
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 a high proportion of annual debt service requirements.
One long-term risk is the fact that discretionary cargo is a key component of POLA's shipping activity, representing more than 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. This risk is compounded by lingering concerns over west coast labor relations following this year's labor unrest. 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 has remained strong despite the volatility of maritime trade. Unaudited fiscal 2015 debt service coverage was 3.82x, higher from the prior year's 3.69x benefitting from expense reductions. Minimum annual guarantees from port tenants provided for over nearly $300 million in 2015, accounting for about two-thirds of total port operating revenues. Minimum annual guarantees from port tenants are projected to continue to provide about $300 million from fiscal years 2016-2020. Port forecasts indicate debt service coverage remains very strong at or above 2.0x. Cash reserves are also robust with $436 million in unrestricted funds, or 831 days cash on hand (DCOH). Cash improved significantly from $263 (467 DCOH) million the year prior due to the reimbursement of pay-as-you-go capital improvements from previously issued series 2014 bond proceeds.
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 historical financial exposure to Alameda Corridor Transportation Authority (ACTA) has been minimal given ACTA's past debt restructuring actions coupled with POLA's strong cash flow and liquidity position. Going forward, both POLA and Long Beach could be required to step in with additional ACTA shortfall payments should a trend of weaker container throughout growth trends continue. ACTA is considering another debt restructuring to minimize or eliminate these projected advances by the two ports. Fitch will monitor ACTA developments to access the financial impacts to a debt restructuring.
The port's capital improvement plan (CIP) is manageable at $803 million through fiscal 2020 and the updated plan has contracted from the prior $1.3 billion CIP due substantially to the completion of prior large capital projects. The capital program contemplates that grants and cash funding will fully cover capital costs without the issuance of long-term debt; however, the port may draw upon its $200 million commercial paper program. While repayment of note draws will be determined at a later time, in Fitch's view, the port has flexibility to manage additional long term borrowings at the current rating level.
The Fitch base case assumes a modest 1.2% annual growth rate in containers and shipping revenues while the rating case assumes no overall growth, taking into account a 7.5% volume contraction in fiscal 2016 followed by recovery through 2020. The rating case considers a weaker economic scenario and some potential diversion of cargo once the Panama Canal expansion has been completed. Given the modest future leverage and high fund balances in place, the port leverage that is currently just 1.9x net debt/CFADS will likely remain at or below 3.0x under both Fitch cases. The leverage position is considered to be low when compared to other major U.S. ports.
All harbor department revenue bonds are secured by senior lien on net revenues of the port.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
Rating Criteria for Ports (pub. 16 Oct 2014)
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