Bond rating agency Moody’s has downgraded a major portion of Alameda Corridor debt, becoming the third major rating agency in December to either downgrade the corridor's bond ratings or issue a negative outlook regarding the financial future of the Southern California rail expressway.
Moody’s downgraded $737 million in corridor subordinate debt from Baa2 to Baa1, or one step above non-investment grade. The agency did affirm its previous rating of A3, or one step above Baa1, on $966 million in corridor senior debt. Moody’s also changed the outlook for the corridor to negative.
Less than a week ago, the Alameda Corridor Transportation Authority, or ACTA, received a negative ratings outlook from ratings agency Fitch. At the time, Fitch also affirmed medium grade ratings for both the senior and subordinate debt.
In April, Standard and Poor’s was the first agency to issue a negative outlook for ACTA. This was a downgrade from the stable outlook S&P issued to ACTA just six months earlier in October 2009. S&P also reaffirmed the negative outlook for ACTA in a review issued last week.
Opened in April 2002 at a cost of $2.4 billion, the Alameda Corridor is a 20-mile-long freight rail expressway that currently shuttles approximately 35 percent of the cargo containers moving through the Southern California ports to a transcontinental railroad yard near downtown Los Angeles.
The construction cost of the corridor was financed by the issuance of just over $1.7 billion in corridor revenue-backed bonds, $400 million from the ports of Long Beach and Los Angeles, and funding from various other government sources. Corridor revenues are generated by fees charged on containers using the corridor.
Bond ratings, such as those issued by Fitch, offer a guide to the level of risk associated with a particular debt issuer--in this case ACTA. Moody’s is one of the three most recognized bond rating agencies along with Fitch and Standards & Poors and one of only ten such agencies recognized by the Securities and Exchange Commission.
Higher ratings, such as "Aaa" or "Aa1" in Moody's case, generally open more financial resources up to an issuer and often at much more favorable terms. Low ratings can mean a significant increase in what a debt issuer has to pay--through higher interest rates or stricter terms--when looking to issue new debt. Low ratings can also prevent an issuer from being able to renegotiate or restructure an existing issuance at more favorable terms.
According to Moody’s, the ACTA downgrade reflects what the agency sees as less than sufficient ability by the corridor to generate enough revenues to cover both consolidated $1.7 billion in senior and subordinate debt.
“The negative outlook reflects the expectation that container growth will remain somewhat sluggish after an initial strong increase,” said Moody’s, “therefore key liquidity may weaken as reserves are utilized to pay for operations and consolidated debt service coverage will likely remain below one times given the current escalating debt service schedule.“
“The downgrade and negative outlook also incorporate the delays in the implementation of a debt restructuring plan that is necessary for coverage relief, and the short timeline remaining to successfully implement a plan before ACTA's target of the October 1, 2011 debt service payment date.”
A fallback measure if refinancing was not available would be the ports of Long Beach and Los Angeles which under the corridor operating agreement are responsible for up to 40 percent of ACTA debt service in the event of shortfalls. A long term reliance on the two ports for corridor debt service could drain the ports of much-needed cash reserves.
Fitch estimated the two ports' total gross liability for corridor debt service "at $60 million to $150 million spread over the years 2012-2020 [and] depending on the severity of the stress assumptions."
All three agencies have pointed out that both ports have an adequate amount of unrestricted cash to meet any near-term shortfall payments without having to adjust their rates or tariffs, any sizable draw down of port cash reserves could reflect on the ports' own ratings.
According to Fitch, as of Sept. 30, 2010, the Port of Los Angeles had $311 million in unrestricted cash and the Port of Long Beach had $403 million in unrestricted cash.
Tuesday, December 28, 2010
