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Fitch: Port of Oakland, CA’s Loss of Second Largest Tenant Negative Yet Manageable

Fitch Ratings learned from the Port of Oakland, California (the port; senior and intermediate lien bonds rated ‘A+’ and ‘A-‘, respectively, with a Stable Outlook) on Jan. 19 that its second largest port terminal operator, Outer Harbor Terminal LLC (a joint venture between Ports America and Mediterranean Shipping Company subsidiary Terminal Investment Ltd) would cease operations at the port. Furthermore, on Feb. 1, Fitch learned that Outer Harbor Terminal LLC (OHT, previously known as Ports America Outer Harbor Terminal, or Ports America) filed for Chapter 11 bankruptcy protection, stating it has been operating at a loss in Oakland and expected difficulty meeting obligations as it wound down its Oakland operations.

Although Fitch views these developments negatively, preliminary financial data from the port suggests the effects ought to be operationally and financially manageable. Fitch will review additional legal and budgetary information as it becomes available, likely in the spring of 2016 and will consider any financial repercussions to the port as a result of OHT’s bankruptcy. Based on these findings, Fitch may accelerate review of the port’s credit rating if such information is deemed to materially weaken the port’s credit profile.

Ports America has indicated the rationale for their withdrawal is strategic, allowing a re-allocation of resources to its operations at the ports of Los Angeles, Long Beach, and Tacoma. The company’s decision is consistent with carrier trends towards aggregating cargo onto larger vessels which then call at fewer gateway ports, seeking to reduce sizeable capital costs. The company did not cite the port’s recent congestion challenges or acute ILWU labor unrest seen in early 2015 as part of its rationale for leaving (for more information on the labor slowdown see ‘Fitch: West Coast Labor Seesaw Leaves Reliability Question’ dated Feb. 24, 2015).

OHT is one of the port’s largest terminal operators, accounting for $37.9 million of fiscal 2015 port revenues, or 32% of the port’s fiscal 2015 minimum guaranteed revenues from Marine Terminal Rentals. The company’s withdrawal from the port is notable, not only because of its size, but also because the company is just six years through a 50-year concession. Termination provisions of the concession agreement were atypically weak, providing the port with a sizable upfront payment but affording quite limited recourse in the event OHT should terminate the agreement early. Other tenant leases at the port are shorter in duration (typically 10 to 15 years) and reportedly contain stronger termination provisions. Management views other tenants as unlikely to leave the port due to the positive competitive impact resulting from the withdrawal of OHT, while Fitch views other tenants’ reportedly stronger termination provisions as an additional layer of protection.

Fitch views the negative impact on the port as significantly mitigated by a number of factors. First, management estimates just about 15% of the port’s cargo is discretionary, with a large portion of cargo comprised of exports from California’s central valley. As a result, the port anticipates the lion’s share of cargo will stay in Oakland, and should be able to be processed at the port’s four remaining terminals, with secondary positive effects on those terminals’ financial positions and port operations, which are not currently running at full capacity. Second, slightly less than half of the Port of Oakland’s revenues derive from maritime activities. The other half stem from commercial real estate activities and Oakland Airport, which will not be affected by OHT’s withdrawal. Third, management is considering plans to re-purpose the vacated terminal for other usages, which may ultimately serve as a financial mitigant. Fourth, the port estimates the first full-year financial impact at $10 million to $15 million, net of certain anticipated offsets such as cargo reallocations to other terminals, to improve annually thereafter as the port recovers over a five- to six-year estimated time horizon.

Based on the fiscal 2016 budget, a decline at the higher estimated range would reflect just 4.5% of total port revenues (inclusive of the port’s cumulative maritime, airport, and commercial real estate operations) and any potential expenditure reductions would help absorb the ultimate impact on the port’s net operating income and related financial metrics.

The terms of OHT’s withdrawal, including the ramifications of the bankruptcy, are still unknown, and it remains to be seen whether the port may be able to negotiate or is entitled to a termination fee. Lease payments are supported by a $6.7 million LOC backed by Citibank though it is not clear, under OHT’s legal circumstances, what financial support the LOC ultimately will provide, if any. OHT ceased making lease payments as of Feb. 1. In the spring management will submit a budget update to the board, which may incorporate the ultimate impact of any settlements between the port, OHT, and other related counterparties. Later in the year management will also update the port’s multi-year projections, likely around June. Fitch will analyse the effect of the final terms of withdrawal and updated financial projections as they become available. If deemed materially negative to the port’s credit profile, Fitch would immediately accelerate its review of the port’s credit rating.
Source: Fitch Ratings

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