Fitch Rates Alameda Corridor Transportation Auth, CA's Sub & Second Sub Revs; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned the following ratings to the Alameda Corridor Transportation Authority's (ACTA) bonds:
--$4.4 million subordinate revenue bonds series 2016A 'BBB+';
--$659.4 million second subordinate revenue series bonds series 2016B 'BBB'.
Fitch has also affirmed the following ratings:
--$771.8 million senior revenue bonds series 1999A, 1999C, 2013A at 'A';
--$179.6 million subordinate revenue bonds series 2004A and 2004B at 'BBB+'.
The Rating Outlook on all bonds is Stable. ACTA also has $83.7 million in unrated series 2012 bonds, which are on parity with the rated senior revenue bonds.
The ratings reflect a vital rail corridor that handles nearly a third of throughput for the San Pedro Bay ports (Port of Los Angeles and Port of Long Beach, both rated 'AA'/Outlook Stable). Backstop commitments from each of the ports provide stability to the ratings and serve to partially offset ACTA's high financial leverage and exposure to changes in throughput. ACTA is particularly sensitive to changes in 20-foot equivalent unit (TEU) volumes due to its escalating, back-ended debt service profile, as well as price adjustment limitations.
The 'A' rating on the senior lien reflects superior metrics and structural protections for this lien, and the lack of need for shortfall advances on this lien throughout the forecast period, while acknowledging the open nature of the lien for future restructuring transactions. The subordinate and second subordinate bond ratings of 'BBB+' and 'BBB', respectively, reflect the aforementioned factors but also consider lower coverage levels, lower structural protections, the subordinate nature of the liens, and reliance upon shortfall advances in certain downside scenarios at these lien levels.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
ECONOMIC ESSENTIALITY: The corridor provides an important intermodal transportation link, handling approximately 35% of all container throughput for the two largest container ports in North America (ports of Los Angeles and Long Beach). ACTA is a vital component of the ports' core business. Throughput volumes on the corridor are highly correlated with San Pedro Bay throughput levels, leading to some volatility in periods where port cargos are reduced.
Revenue Risk - Price: Midrange
STRONG COUNTERPARTY SUPPORT: ACTA has sound rate setting mechanisms to generate revenues linked to container throughput, though rate increases are limited to consumer price index (CPI) adjustments (1.5% minimum annual increase, 4.5% max increase). In addition to ACTA's own operating revenues, the ports of Los Angeles and Long Beach provide ACTA with financial support in the form of a commitment to cover up to 40% of any debt service shortfall at ACTA. The BNSF and Union Pacific railroads cover operating costs through separate assessment charges.
Infrastructure Renewal/Development: Stronger
MINIMAL CAPITAL NEEDS: The corridor has no capital program beyond closeout of the original project and ongoing maintenance. No additional borrowing for capital projects is anticipated.
Debt Structure: Stronger (Senior); Midrange (Subordinate and Second Subordinate)
REASONABLE DEBT STRUCTURE: ACTA's debt is fixed rate with no refinancing risk, though the second subordinate debt is largely back-ended. Reserves consist of sureties for the rated senior bonds and the second subordinate bonds, while the subordinate bonds have cash funded reserves. The notching distinctions between the liens reflect the subordinated nature of the subordinate and second subordinate bonds.
ESCALATING ANNUAL DEBT OBLIGATIONS, MODEREATE COVERAGE: ACTA currently has relatively high all-in leverage of 14.2x net debt-to-cash flow available for debt service (CFADS). When including contingent port obligations as additional cashflow as allowed under the indenture, the leverage metric is 10.4x. Under Fitch base and rating cases, leverage is expected to decrease over the next five years, however, annual debt service obligations increase through maturity in 2038. All-in debt service coverage averages 1.6x in Fitch's base case and 1.4x in Fitch's rating case. All-in loan life coverage ratios (LLCR) and project life coverage ratios (PLCR) are adequate and average 1.27x and 2.43x, respectively, in Fitch's rating case, supportive of the ratings.
Negative - Throughput Volatility: Sustained underperformance over time or heightened volatility due to cargo shifts may result in ongoing dependency for shortfall advances and lower coverage cushion, pressuring the rating.
Negative - Counterparty Exposure: Material changes in the credit quality of the two port counterparties, or an inability of the railroads serving ACTA to cover O&M, may pressure the rating.
Positive - Growth Dependence a Constraint: Given ACTA's increasing debt service profile and dependence on revenue growth, upward rating migration is unlikely.
SUMMARY OF CREDIT
ACTA is issuing approximately $4.4 million in series 2016A subordinate refunding bonds and $659.4 million in series 2016B second subordinate refunding bonds to refund a portion of the subordinate 2004A bonds. The transaction seeks to reduce debt costs and to reduce the frequency and amount of projected future shortfall advances required from the San Pedro Bay ports. The refunding will not extend the bonds' final maturity past 2037. The bonds are expected to price the week of April 25.
In fiscal 2015 (ending June 30), 15 million TEUs, 35% of which were subject to a corridor fee, were transferred through the San Pedro Bay ports. ACTA saw a slight decline in TEU volumes in 2015, with throughput dropping 0.7% (vs. a 0% increase for San Pedro Bay ports for the same period). The decrease in throughput was primarily driven by the West Coast labor slowdown that took place late in calendar 2014 and early in calendar 2015. Year to date (first seven months of fiscal 2016 through January) ACTA's throughput is down 1% as compared to a 10.1% increase for the same period at the San Pedro Bay ports.
ACTA is particularly sensitive to changes in TEU volumes, as the portion of cargo that utilizes the corridor is. Use fee and container charges, which represent 96% of operating revenues, decreased by $3.4 million, or 3% in fiscal 2015, reflecting the decline in throughput volumes for that year. Year to date revenues are 6% below budget due to lower than projected throughput. Due to ACTA's escalating debt service profile and limited ability to raise rates (rates are increased annually at the greater of 1.5% or CPI up to a maximum of 4.5%), continued throughput and revenue growth is necessary to maintain the credit profile of this asset at current levels.
Fitch's financial analysis is based on a consultant's recent volume analysis for the San Pedro bay ports, specifically focusing on factors affecting Inland Point Intermodal (IPI) traffic. This is the TEU volume handled by the ACTA corridor and is the traffic most at risk of diversion given its discretionary nature. IPI traffic does not serve the immediate 'captive' Southern California market and thus can be handled by other ports. Fitch does not consider any further refunding or restructuring in its cases beyond the current 2016 transaction, though additional restructuring is viewed as likely due to the sizable step-up in debt service in 2027 under the current amortization profile. ACTA's debt service profile amortizes through 2037 but could be extended until 2062 under the terms of the Use and Operating Agreement.
Fitch's base case long-term IPI container growth rates are assumed to be 3.7% overall in the 2017-2040 timeframe. This growth rate assumes some diversion of IPI cargo to U.S. East Coast and Canadian ports, as well as a shift towards larger vessels which benefits the San Pedro Bay gateway due to their water depth and on-dock facilities. Loaded IPI TEUs will grow 4%, while empties will grow 1.1% annually to 2040, with empties falling due to an expected drop in rail empties as rerouting to all-water routes occurs in the 2020-2027 timeframe. Rates are modelled to grow at 1.9% annually, consistent with Fitch's CPI expectations for the U.S. This results in all-in debt service coverage ratios (DSCRs) including port contingent obligations per the indenture average 1.59x with a minimum of 1.26x, while all-in leverage averages 4.7x with a maximum of 10.4x. Under this scenario, $112 million in additional advances are needed to meet debt service obligations over the forecast period, taking place in the 2026-2030 timeframe with shortfalls ranging from $1 million to $44 million per year during that timeframe. All-in PLCRs and LLCRs are healthy averaging 3.4x and 1.5x, respectively.
Fitch's rating case considers downside volume analysis for the San Pedro Bay ports, which contemplates the effects of greater cargo diversion away from the San Pedro Bay area and a slower move to larger vessels calling in San Pedro Bay, resulting in lower throughput growth. The low growth downside for IPI TEU forecast (2.7% loaded, -1.1% empty growth through 2040) was applied with a 1.5% CPI increase, corresponding to the lowest growth possible for each year given ACTA's minimum CPI floor. Under this scenario, use fee revenue growth is 3.8% through 2040, leading to all-in DSCRs with contingent obligations averaging 1.35x with a minimum of 1.06x. All-in leverage averages 5.2x with a max of 10.9x. All-in PLCRs and LLCRs are reasonable remaining above 1.65x and 1.17x, respectively.
Both the Los Angeles and Long Beach ports are each legally and individually committed under the operating agreement to cover shortfalls up to 20% of ACTA's annual debt service payment (aggregate of 40% total ACTA debt service payment or an average of $52 million over the next five years). A total of $11.8 million in shortfall advances were made in 2011 and 2012. No additional advances were requested for 2013 through 2015, though $13.9 million in excess debt service reserve funds from the 2004A bonds were used to meet debt service requirements in 2014, and in 2015 a further $19 million was released from the final maturity of the 1999D bonds and excess reserve balance from the 2004A bonds. The release was offset by a deposit of $1 million from the Revenue fund into the 2012 bond debt service reserve fund. ACTA recently announced estimated shortfall advances of $4 million ($2 million from each port) for fiscal 2016 if the refunding does not take place. Even with the restructuring, shortfall advances are expected in the 2027 timeframe under all scenarios due to the step-up in debt service at that time, which is expected to be addressed through future refundings and restructurings.
The backstop provided by the shortfall advance structure improves ACTA's standalone credit profile by virtue of the ports' superior financial resources and near-term contractually obligated revenue streams. Over 70% of both ports' operating revenue comes from minimum annual guarantees (MAGs) payable by tenants regardless of cargo volume. Fitch rates Port of Los Angeles 'AA' with a Stable Outlook and Port of Long Beach 'AA/AA-' with a Stable Outlook. Both ports have an adequate amount of unrestricted cash to meet any near-term shortfall payments without having to adjust their rates or tariffs. However, should there be a material adverse change in overall port throughput levels, or should either port express an unwillingness to honor its obligations under the shortfall advance structure, ACTA's credit quality may be affected.
ACTA is a public body that administers the Alameda Corridor, a 20-mile multi-track freight rail system linking the ports of Los Angeles and Long Beach, the two largest container ports in North America, with the transcontinental rail lines near downtown Los Angeles. The $2.4 billion corridor opened in April 2002 and currently collects revenue on roughly 35% of all container throughput through the San Pedro Bay ports. Pursuant to an operating agreement with ACTA, the BNSF and Union Pacific railroads pay monthly assessments to cover certain costs of maintenance, operations and repair of the corridor, giving bondholders a gross lien on corridor revenue. The corridor connects existing railroad lines near the Los Angeles central rail yards with the San Pedro Bay port facilities.
Bondholder security includes the pledged revenue stream and all other monies held by the trustee except for the Maintenance and Operations (M&O) Fund and the Reserve Account, both of which are for purposes of operating and capital maintenance of the corridor. Pledged revenues consist primarily of the volume assessment charges payable by the railroads and debt service shortfall advances payable by the ports. Shortfall advances from the ports are subordinate to their own costs and debt obligations. A Use and Operating Agreement among ACTA, the ports and the railroads governs the volume assessment of charges.