Fitch Affirms Port of Los Angeles Harbor, CA's Rev Bonds at 'AA'; Outlook Stable

Fitch Ratings has affirmed approximately $764.5 million of outstanding Harbor Department of the City of Los Angeles (Port of Los Angeles), California revenue bonds at 'AA'. The Rating Outlook is Stable.

KEY RATING DRIVERS

Very Strong Market Position: The Port of Los Angeles (POLA) is the nation's largest container port, located on the west coast of the United States. 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. Forty-five to fifty percent of imported cargo stays in the port's 'home' market. Following the downturn in maritime trade in fiscal years 2008 and 2009, POLA has experienced a healthy return in cargo volumes. Exposure to volatile international trade remains a risk to throughput levels. Currently POLA trade is largely dependent on far east imports. Revenue Risk -Volume: 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 U.S. dollar values. Long-term guaranteed contracts with most tenants, making up 66% of fiscal year 2013 revenue, mitigate cargo volume risk. Revenue Risk -Price: Stronger

--Flexible Capital Program: The port's capital program is modestly sized and flexible. POLA has a moderate and flexible $1.4 billion capex program 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, including on-dock rail, near-dock rail, and direct connections to the national rail network through the Alameda Corridor, and the southern California freeway system. 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. Infrastructure Development/Renewal: 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 Structure: Stronger

--Strong Financial Profile: The port benefits from a strong balance sheet highlighted by a very strong liquidity position. FY2013 unrestricted reserves of $352 million, representing 630 days cash on hand. Port leverage is also very low with a 2.2 times net debt/cash flow available for debt service (CFADS) ratio. The port's financial position is further supported by strong and stable revenue sources through long-term lease agreements with most tenants. Minimum annual lease payments represent approximately 66% of total operating revenues at the port, and provide approximately 3.8x coverage of current maximum annual debt service (MADS) on a gross revenue basis and in the range of 1.0x on a net revenue basis. Potential contingent liabilities to ACTA for debt payments, although none are currently projected, are legally subordinate to port revenue bonds.

RATING SENSITIVITIES

--Substantial changes in container tonnage processed at the port;

--Marked shift in the diversity of revenue sources supporting the port;

--A sustained reduction in debt service coverage ratios falling below the 2.0x range;

--Divergence from current leverage levels due to changes in the port's cost structure and scope of capital plan.

SECURITY

All harbor department revenue bonds are secured by senior lien on revenues of the port with a final maturity in 2040.

CREDIT UPDATE

Following a period of notable reduction in trade volumes during the early periods of the 2007-2009 economic slowdown, port container volumes have since shown signs of healthy improvement. Container units (20-foot equivalent units or TEUs) rose to 7.8 million in fiscal 2013, which is 5.0% lower than the previous year. Based on six months' data for fiscal 2014, TEU counts have improved by 2.2%. 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 several 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 continues to remain quite strong even with the economic effects on maritime trade. Fiscal 2013 debt service coverage was 2.93x reflecting a decline from 3.3x in the previous year. The coverage decline was based on a 4.9% drop in container volumes and a 2.8% reduction in shipping revenues derived in part from a loss of one of the port's Asian service lines to the neighboring Port of Long Beach. Stability in tonnage is more evident in fiscal 2014 with a 2.2% increase in twenty-equivalent units (TEUs) over the first half period. Minimum annual guarantees from port tenants provided for $278 million in 2013, accounting for nearly 66% of total port revenues and providing 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 $350 million in unrestricted funds which translate to 626 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 over $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 approximately 45% 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.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719985

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816311

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