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Fitch Affirms Port of Long Beach, CA’s Revs ‘AA’/’AA-‘/’F1+’; Outlook Stable

Fitch Ratings has affirmed its ‘AA’ rating on $1.1 billion of outstanding senior lien Port of Long Beach harbor revenue bonds and notes, its ‘F1+’ rating on $145 million in outstanding 2020C notes and its ‘AA-‘ rating on the $500 million outstanding, although yet to be drawn, Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Rating Outlook on all bonds is Stable.

RATING RATIONALE

The ratings reflect the port’s strong market position, with resilient revenues from long-term contractual guarantees that are sufficient to cover both the port’s outstanding senior debt obligations and the subordinate TIFIA loan. Contractual guarantees should continue to provide revenue stability as the port proceeds with drawing down on its TIFIA loan for its sizable $1.7 billion long-term capital improvement plan (CIP; fiscal years 2020-2029). This plan, while costly, will help to both ensure the port’s competitive position and provide capacity enhancement to meet growth. The port has maintained strong financial metrics and considerable liquidity, in line with management’s guidelines of a 2.0x minimum debt service coverage ratio (DSCR) and 600 days’ cash on hand (DCOH) through the coronavirus pandemic to date, with continued maintenance of these levels expected as the economy continues to recover, and through execution of the port’s CIP. The one-notch differential on the TIFIA loan reflects its subordinate claim on revenues.

KEY RATING DRIVERS

Strong Market Position – Revenue Risk (Volume): Stronger

The Port of Long Beach is the nation’s second-largest container port, located on the West Coast. Together with the neighboring Port of Los Angeles, it constitutes the San Pedro Bay Port Complex – the ninth-largest port complex in the world. Fiscal 2020 20-foot equivalent units (TEUs) were 7.7 million, a 1.1% decrease over 2019. Volume performance was negatively impacted in 2019-2020 by the shifting trade policy with China and the impacts on global maritime trade due to the coronavirus pandemic. Volumes have since rebounded, with total fiscal 2021 YTD TEUs through February growing by over 25% over the prior period. The port’s ability to handle larger ships, sizable local market share and strong representation across shipping alliances continues to position the port favorably even as the shipping industry weathers considerable volatility in the current environment.

Resilient Revenues through Volatility – Revenue Risk (Price): Stronger

With a large majority of operating revenues coming from the container business (approximately 76% of operating revenues), the port is exposed to fluctuations in international trade and competitive pressures, which can lead to volume volatility. However, the port’s revenues have proven to be largely insulated from trade-related revenue volatility due to the high percentage of long-term guaranteed contracts in place with most tenants. Minimal annual guarantees accounted for 88% of operating revenues in fiscal 2020, consistent with prior years, and counterparties have largely continued to honor their agreements despite coronavirus-related volatility. Guaranteed annual minimums are scheduled to rise in the medium term as contractual step-ups related to the final phase of the Middle Harbor redevelopment project reach completion.

Modern Facilities, Sizable Capital Program – Infrastructure Development/Renewal: Midrange

The port benefits from modern facilities. Its 10-year, $1.7 billion capital program is sizable, but Fitch notes expenditures are frontloaded, with over half completed by 2024, and that no additional borrowing is anticipated at this time to fund the program. Recently completed major projects include the new port headquarters (completed in fiscal 2019) and the Gerald Desmond Bridge replacement (completed in 2020); other major projects are nearing completion, including the Middle Harbor redevelopment program, with completion expected in 2021. Ongoing rail improvements are expected to extend beyond the 10-year CIP period. No adjustments to the CIP have been made or are anticipated due to the pandemic, although management notes that plans are flexible and the project scope and timing can be adjusted, if needed. The infrastructure score may migrate upward as large components of the CIP reach completion. Careful management of the plan’s scope and cost relative to business demand such, since maintaining the port’s strong financial profile is important to rating maintenance.

Fixed Rate, Amortizing Debt – Debt Structure (Senior): Stronger/Debt Structure (Subordinate/TIFIA Loan): Midrange

The senior bonds are all fixed-rate and benefit from strong covenants, although Fitch notes that outstanding debt does not benefit from a cash-funded debt service reserve fund (DSRF). The lack of a DSRF is not viewed as a credit negative given the robust current and anticipated levels of unrestricted reserves. The subordinate TIFIA loan is also fixed-rate and benefits from a fixed amortization profile but has a junior claim to revenues. Fitch views positively the port’s board ordinance requiring maintenance of a 2.0x DSCR (all-in) and 600 DCOH, which serve to protect bondholders as the TIFIA loan is drawn down for the CIP.

Financial Profile

The port has a healthy balance sheet, evidenced by a strong liquidity position, even as cash is used for the ongoing CIP. Liquidity at fiscal YE20 of $546 million represents over 1,000 DCOH. The senior DSCR has remained near 3.0x since 2011, and it increased above 4.0x in 2020. The DSCR is projected to remain at or above 3.0x in Fitch’s rating case and downside scenarios, even when considering the effects of coronavirus-related declines. Port leverage for 2020 came in at 2.2x net debt to cash flow available for debt service (CFADS) on all obligations, with the increase due to the issuance of additional bond anticipation notes (BANs) in 2020 to support the port’s TIFIA loan, which has yet to be drawn.

PEER GROUP

The Port of Los Angeles (AA/Stable) is the closest peer to Long Beach, sharing the San Pedro Bay and access to the Alameda Corridor. Long Beach’s liquidity compares favorably with Los Angeles’ and current metrics are comparable, while Long Beach’s ongoing capital plan is larger than that of Los Angeles. Port Houston (AA/Stable) is another comparable port, with access to tax revenues and comparable borrowing for its sizable CIP but lower guaranteed revenue.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

–Given the port’s already strong profile and current high rating level, upward rating migration is considered unlikely.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–Higher than anticipated volatility or a steady downward trend in port container volumes.

–Financial forecasts indicating an inability to meet management’s policy of maintaining a 2.0x DSCR and liquidity equivalent to 600 DCOH.

–Upward revisions to the capital program or a higher dependence on debt funding, resulting in weaker leverage metrics or measurably reducing port liquidity.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.

CREDIT UPDATE

TEUs fell 1.1% in fiscal 2020, closing out the year at 7.7 million TEUs. The decline reflects volatility linked to the coronavirus pandemic. Fitch notes that 2020 throughput remains 5.0% in excess of the pre-recession peak of 7.4 million TEUs. Overall TEU growth for the port remains in line with U.S. GDP growth, with the 2015-2020 CAGR at 1.8%. Fiscal 2021 YTD TEU volumes reflect a rebound from the coronavirus TEU disruptions, with fiscal YTD TEUs through February up over 25% over 2020. This growth reflects depressed volumes in February 2020 due to the pandemic coupled with record monthly volumes in October and December, as well as increased shipping activity as volumes rebounded starting in the summer of 2020. Management indicated that the initial closures of factories in China at the beginning of the outbreak resulted in higher-than-normal cancellations of vessel calls from China, which in turn affected U.S. inventories. Ocean carriers have since continued to add unscheduled vessel services to make up for increased demand and replenishing inventories, subsequently creating a backlog of vessels into the San Pedro Bay ports. Although management indicates this volume surge is expected to continue into mid-2021, it believes congestion levels should normalize over the summer.

Operating revenues for fiscal 2020 were $398.6 million, representing a 3.3% decrease from the prior year. This decrease is primarily driven by the 1.1% volume decrease in container terminals due to the pandemic. The overall five-year CAGR for operating revenues shows an increase of 2.3%. Operating expenditures (opex) for 2020 were $142.7 million, an increase of about 5.7% over the prior year. Despite the TEU growth shown to date, management has budgeted conservatively for fiscal 2021, anticipating 0.5% growth in revenues and a 9.3% increase in expenses.

Fitch notes that declines and recoveries in volumes have had a 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 accounted for 88% of operating revenues in fiscal 2020, and they are more than sufficient to cover both the port’s outstanding senior debt obligations and the subordinate TIFIA loan. Even during periods of volume fluctuation (previously due to labor unrest and more recently due to the pandemic), minimum guarantees have been honored, and management indicates that key tenants desire to maintain long-term operations at the port. Contractual guarantees are expected to increase as the Middle Harbor project comes online.

Historically, the port has maintained high DSCRs, with net coverage on all obligations in the 3.0x range both prior to the recession and since fiscal 2011. Coverage increased to above 4.0x in 2020 based on preliminary results, well above the rate covenant of 1.25x. Cash reserves are extremely robust with $546 million in unrestricted funds, which translates to over 1,100 DCOH. The port manages to a minimum of 2.0x net coverage and 600 DCOH, per an ordinance adopted by the Board of Harbor Commissioners in 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 as the port proceeds with borrowing for its capital program and moves away from cash-funded DSRFs for its future issuances.

The port’s financial exposure to the Alameda Corridor Transportation Authority (ACTA) has historically remained low given ACTA’s past debt restructuring actions coupled with the Port of Long Beach’s (POLB’s) strong cash flow and liquidity position. However, both POLB and the Port of Los Angeles could be required to step in with additional ACTA shortfall payments should a trend of weaker container throughput growth continue. The 2016 restructuring of ACTA’s debt made it less likely that POLB will have to make any significant shortfall payments through fiscal 2026. However, due to coronavirus-related effects, there is the potential that POLB will have to contribute some shortfall payments, although management does not anticipate that occurring at this time.

The port’s CIP is manageable at $1.7 billion through fiscal 2029. No new money debt is envisioned for funding at this time. Management indicated that the port’s CIP is largely on time and on budget. The capital program contemplates that grants and cashfunding will fully cover capital costs without the issuance of long-term debt.

FINANCIAL ANALYSIS

Fitch has developed two scenarios that serve as the basis for this review. The two cases are labeled as the “Coronavirus Rating Case” and the “Coronavirus Sensitivity Case”. Given the current economic environment due to the coronavirus and the unlikeliness of a stable operating environment over the near term, Fitch’s Coronavirus Rating Case is also considered the Base Case.

The Coronavirus Rating Case assumes continued declines in TEU volumes in fiscal 2021 from fiscal 2020, with recovery by fiscal 2023. Thereafter, TEUs grow at 0.6% per year. Expenses grow at approximately 4.6% per year. Under this case, coverage averages 3.7x through 2030 and leverage rises to 2.7x in fiscal 2021, reflecting the expected draws on the port’s 2020 TIFIA loan.

The Coronavirus Sensitivity Case assumes steeper declines in fiscal 2021 over the rating case followed by a more prolonged recovery, reaching pre-pandemic TEU volumes by fiscal 2024. Thereafter, TEUs grow at 0.6% per year. Expenses grow at approximately 5.1% per year. Under this case, coverage averages 3.5x with a minimum coverage of 3.0x reached in fiscal 2021. Leverage rises to 2.9x in fiscal 2021. Overall financial metrics under both cases are consistent with the ‘AA’ category, as reflected in Fitch’s indicative rating guidance in its port criteria.

SECURITY

The senior lien bonds are secured by a pledge of and a lien upon gross revenues. The TIFIA loan is secured by a lien on the port’s subordinate revenues, or gross revenues remaining after the payment of debt service on the senior bonds, and the funding of any DSRFs established for the senior bonds and any other senior obligations.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
Source: Fitch Ratings

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