Thursday, March 25, 2010

Long Beach Port Gets Strong 'AA' Rating from Fitch

Despite falling cargo numbers and an aging infrastructure, ratings agency Fitch has reaffirmed the Port of Long Beach credit rating as 'AA.'

The move comes only days after the port approved a major debt restructuring plan that, by taking advantage of lower interest rates and avoiding certain federal taxes, will allow the port to save up to $1.3 million a year.

Fitch almost immediately affirmed the very strong 'AA' rating on approximately $785 million of outstanding harbor revenue bonds and harbor revenue refunding bonds. All of the port's bonds are secured by a gross lien on port revenues, with a final maturity in 2027. In addition, the port has $31.4 million in commercial paper notes, series A, which are not rated by Fitch.

Like many large ports, Long Beach saw declines in cargo volume during 2008 and 2009 due to both the global economic situation and an overall reduction in U.S. consumer spending.

Total container volume at the port dropped 21.6 percent in 2009 to 5.3 million TEUs for the year, following total container volume declines of 8.5 percent for fiscal 2008. Cumulatively, the port has experienced a 28.2 percent drop in total container volume from the peak year of 2007, when 7.4 million TEUs moved through the port. Fitch attributed portions of these declines to adjustments in schedules and ports of call by shipping lines servicing the port, though the majority of the decline was attributed to the broader global economic downturn.

Fitch highlighted that despite the declines, in 2008 and 2009 the port implemented customer incentive programs that have experienced success with both terminal operators and ocean carriers. In addition, due to the port reliance on minimum annual guaranteed lease revenues and lease terms which establish a floor of revenues, the port has minimized risk to its bottom line. The port has maintained an average earning from these minimum annual guarantees of around 60 percent of total operating revenues. This has been sufficient, Fitch pointed out, to maintain the port's annual debt service at a ratio of 2.72 times cash-to-debt.

Despite one-time expenses and cost increases at the port raising total operating expense at a compound annual growth rate of 21 percent for fiscal 2004-2008, Fitch expects "that port management will make adjustments and control the expense profile to preserve the port's profitability and meet all internal policies going forward."

And while the port has maintained debt service levels as high as 3.1 times cash-to-debt, the ratio dropped slightly to 2.8 times cash-to-debt in 2009, well above the rate covenant of 1.25 times cash-to-debt. The port maintains an internal debt ratio minimum level of 2.0 times cash-to-debt.

Fitch also ran scenarios that contemplated further container volume declines through 2011, funding of the port's full capital plan with an additional $2 billion of debt obligations through 2038, and careful management of operating and capital expenditures. The analysis found that the port in this situation should be able to maintain a debt coverage ratio of 2.0 times cash-to-debt. Additional declines or stagnation in traffic volumes, according to Fitch, could result in the port being forced to delay or defer portions of its capital program in order to maintain the proper debt coverage ratio.

Currently, the port's 10-year capital improvement plan totals approximately $4.7 billion, of which 26 percent is set to be debt financed. Projects include improvements to container shipping terminals, expansion of on-dock rail facilities, construction of a new bridge to replace the aging Gerald Desmond Bridge, construction of a new Port administration building, dredging of the harbor, and various security improvements.