Bond rating agency Fitch on Friday affirmed "high" and "good" level ratings on $1.7 billion in Alameda Corridor bond debt, while at the same time issuing a negative ratings outlook for the bonds.
Opened in April 2002, the $2.4 billion 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 $2.4 billion 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 various other government sources. Corridor revenues are generated by fees charged on containers using the corridor.
On Friday, Fitch issued an "A" rating, labeled as upper medium grade, on $966 million in bonds issued by the corridor's governing authority in 1999. The agency also issued a "BBB+" rating, labeled as lower medium grade, on $737 million in subordinate issuances from 1999 and 2004.
Both of these ratings, while nowhere near as high as the "AA" ratings held by the two ports, remain in fairly positive territory. The "BBB+" rating is still two full ratings levels above non-investment grade bonds.
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 the Alameda Corridor. Fitch is one of the three most recognized bond rating agencies along with Moody's and Standards & Poors and one of only ten such agencies recognized by the Securities and Exchange Commission.
Higher ratings, such as "AAA," 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.
More worrisome for the corridor than the bong ratings, however, is the ratings outlook issued by Fitch. The corridor had held a "ratings watch negative," which is issued when Fitch sees a heightened probability of a downward rating change. On Friday, Fitch changed this to a "negative ratings outlook," a more concrete assertion applied when Fitch believes that the issuer's rating is likely to move downward over a one- to two-year period.
In issuing the ratings and outlook, Fitch pointed out that although the corridor saw dramatic downturns in cargo volumes in 2008 and 2009, container volumes moved along the corridor in 2010 have show a 14 percent increase compared to the first 10 months of 2009.
"This indicates that volume is recovering somewhat," said a Fitch statement, "however, the volume setback incurred in 2008 and 2009 combined with the corridor's escalating debt service profile mean that action is still needed to meet the authority's debt service obligations."
Fitch pointed out that there are several options available for the corridor to address the anticipated shortfall in revenues, including refinancing a portion of outstanding debt via the Railroad Rehabilitation and Improvement Financing, or RRIF, offered through the United States Department of Transportation's Federal Rail Administration. The RRIF provides direct federal loans and loan guarantees to finance development of railroad infrastructure. ACTA applied for a RRIF loan in March 2010 to restructure the $737 million in subordinate bonds, and expects a decision on its application in early 2011.
"Another option would be to refinance a portion of existing debt with a traditional municipal finance issuance, utilizing the existing senior and subordinate liens," said Fitch. "In both these cases, ACTA would seek to reduce annual debt service requirements and backload debt, while substantially reducing or eliminating the need for port shortfall advance payments to fund a portion of debt service in future years."
The real concern would be if the corridor could not meet its debt service. The ports of Long Beach and Los Angeles are legally committed under the corridor operating agreement to cover up to 40 percent of the corridor's annual debt service payment in the event of shortfalls.
While on the one hand this provides the corridor with a backstop that improves its credit standing, such a drain on port revenue, especially if the shortfalls continue for a long period of time, could significantly impact the two ports' cash flow situations.
Fitch estimates "the ports' gross joint liability for corridor debt service at $60 million to $150 million spread over the years 2012-2020 depending on the severity of the stress assumptions."
While Fitch points 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 21, 2010
