Fitch Ratings - New York - 29 Aug 2024: Fitch Ratings has assigned a 'AA' rating to approximately $219.3 million of series 2024A-1, series 2024A-2, series 2024B-1, series 2024B-2, and series 2024C refunding revenue bonds issued by the Harbor Department of the City of Los Angeles, CA's (Port of Los Angeles [POLA]). Fitch has also affirmed approximately $450.4 million of outstanding revenue bonds at 'AA'. The Rating Outlook is Stable.
RATING RATIONALE
The rating reflects POLA's leading market position as a primary port of call in a large and economically diverse region, with resilient revenues from long-term contractual guarantees that are adequate to cover the entirety of the port's annual senior debt service obligations. The rating is further supported by a history of strong financial metrics and considerable liquidity levels, with unrestricted funds in excess of the outstanding debt balance.
Maintenance of minimal leverage and debt service coverage ratios (DSCR) substantially above management's guideline of 2.0x is expected throughout execution of the capital program (CIP).
KEY RATING DRIVERS
Revenue Risk - Volume - High Stronger
Very Strong Market Position: POLA is the nation's largest container port and serves the major global shipping lines. Together with the neighboring Port of Long Beach, CA (AA/Stable), the two constitute the San Pedro Bay Port Complex, one of the largest port complexes in the world.
The port's ability to handle larger ships, its sizable local market share, and its strong intermodal transportation infrastructure continue to position the port favorably. These strengths serve as mitigants to POLA's exposure to fluctuations in international trade, labor risks, and throughput levels that remain largely dependent on East Asian imports.
Revenue Risk - Price - Stronger
Resilient Revenue Stream: Long-term tenant leases with minimum payment levels help to mitigate cargo volume risk and protect revenues from potential volatility given a majority of operating revenues are derived from the container business, exposing the port to fluctuations in international trade and competitive pressures that can lead to volume volatility. Minimum annual guarantees, which have historically accounted for a substantial 60% to 80% of operating revenues, are expected to continue to provide revenue stability going forward.
Infrastructure Dev. & Renewal - Stronger
Flexible Capital Program: POLA's five-year CIP (2025-2029) is modestly sized for a port of its scale at $1.3 billion and prioritizes capital projects that focus on rail improvements, sustainability and supply chain efficiency. The capital plan is expected to be fully funded with cash and grants. Benefitting from ongoing capital investments, the port's terminal facilities are modern and contiguous and have excellent access to intermodal transportation facilities. Management has indicated that they do not plan to issue long-term debt to fund the CIP.
Debt Structure - 1 - Stronger
Conservative Debt Structure: The senior bonds are fixed-rate and benefit from strong covenants, although outstanding debt following the refunding transaction and defeasances will no longer have a cash-funded debt service reserve fund (DSRF). Fitch does not view the lack of DSRF as a credit negative given the robust current and anticipated levels of unrestricted reserves.
The port manages its financial profile to maintain a minimum of 2.0x net revenue coverage and 500 days cash on hand. Fitch views this policy as providing liquidity stability for bondholders and sees continued management to these levels as important to maintenance of credit quality given the lack of a cash-funded DSRF.
Financial Profile
Historical financial performance at POLA has remained strong despite the volatility of maritime trade in recent years. The port benefits from a strong balance sheet and high coverage ratios, highlighted by fiscal 2024 (unaudited) unrestricted reserves of $1.5 billion (equal to over 1,700 days cash on hand) and debt service coverage of 6.2x. Port leverage is also very low and offset by the port's sizable cash position, resulting in negative leverage.
Financial metrics under Fitch's rating case, which considers a hypothetical recessionary stress followed by moderate recovery, are appropriate overall for the 'AA' rating category, despite cash flows susceptibility to multiyear negotiated wage hikes and to higher-cost reimbursements to the city of Los Angeles.
PEER GROUP
Among peers in the 'AA' rating category, such as Port of Long Beach, CA and the Hawaii Department of Transportation (AA-/Stable), POLA demonstrates comparably strong cargo activity and robust coverage metrics. Leverage for all three ports is also consistent with the 'AA' rating category. Los Angeles and Long Beach share the San Pedro Bay and access to the Alameda Corridor.
RATING SENSITIVITIES
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;
--A sustained reduction in DSCRs falling below the 2.0x range in Fitch's rating case;
--Divergence from the current very low leverage levels to materially above 6.0x due to upward revisions to the capital program requiring significant debt funding, and/or a material depletion of port liquidity.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--Given POLA's already high rating level and sector-wide risks inherent to ports, upward rating action is unlikely.
TRANSACTION SUMMARY
The Harbor Department of the City of Los Angeles expects to issue approximately $219.3 million of series 2024 refunding revenue bonds. Bond proceeds, together with other available funds, will be used to refund and defease the series 2014 revenue bonds ($264.7 million in combined aggregate principal outstanding) and pay costs of issuance. The transaction is expected to achieve total debt service savings of $31.2 million or 11.8% of refunded par on a net present value basis, reflected in a reduction of annual debt service through 2044 and greater savings upfront in 2025-2026.
SECURITY
The bonds are secured by a senior lien on net revenues of the port.
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
Los Angeles Harbor Department (CA) has an ESG Relevance Score of '4' for Labor Relations & Practices due to follow-on impacts of labor relations between port tenants and longshoremen during periods of contract negotiations, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Fitch Ratings - New York - 29 Aug 2024: Fitch Ratings has assigned a 'AA' rating to approximately $219.3 million of series 2024A-1, series 2024A-2, series 2024B-1, series 2024B-2, and series 2024C refunding revenue bonds issued by the Harbor Department of the City of Los Angeles, CA's (Port of Los Angeles [POLA]). Fitch has also affirmed approximately $450.4 million of outstanding revenue bonds at 'AA'. The Rating Outlook is Stable.
RATING RATIONALE
The rating reflects POLA's leading market position as a primary port of call in a large and economically diverse region, with resilient revenues from long-term contractual guarantees that are adequate to cover the entirety of the port's annual senior debt service obligations. The rating is further supported by a history of strong financial metrics and considerable liquidity levels, with unrestricted funds in excess of the outstanding debt balance.
Maintenance of minimal leverage and debt service coverage ratios (DSCR) substantially above management's guideline of 2.0x is expected throughout execution of the capital program (CIP).
KEY RATING DRIVERS
Revenue Risk - Volume - High Stronger
Very Strong Market Position: POLA is the nation's largest container port and serves the major global shipping lines. Together with the neighboring Port of Long Beach, CA (AA/Stable), the two constitute the San Pedro Bay Port Complex, one of the largest port complexes in the world.
The port's ability to handle larger ships, its sizable local market share, and its strong intermodal transportation infrastructure continue to position the port favorably. These strengths serve as mitigants to POLA's exposure to fluctuations in international trade, labor risks, and throughput levels that remain largely dependent on East Asian imports.
Revenue Risk - Price - Stronger
Resilient Revenue Stream: Long-term tenant leases with minimum payment levels help to mitigate cargo volume risk and protect revenues from potential volatility given a majority of operating revenues are derived from the container business, exposing the port to fluctuations in international trade and competitive pressures that can lead to volume volatility. Minimum annual guarantees, which have historically accounted for a substantial 60% to 80% of operating revenues, are expected to continue to provide revenue stability going forward.
Infrastructure Dev. & Renewal - Stronger
Flexible Capital Program: POLA's five-year CIP (2025-2029) is modestly sized for a port of its scale at $1.3 billion and prioritizes capital projects that focus on rail improvements, sustainability and supply chain efficiency. The capital plan is expected to be fully funded with cash and grants. Benefitting from ongoing capital investments, the port's terminal facilities are modern and contiguous and have excellent access to intermodal transportation facilities. Management has indicated that they do not plan to issue long-term debt to fund the CIP.
Debt Structure - 1 - Stronger
Conservative Debt Structure: The senior bonds are fixed-rate and benefit from strong covenants, although outstanding debt following the refunding transaction and defeasances will no longer have a cash-funded debt service reserve fund (DSRF). Fitch does not view the lack of DSRF as a credit negative given the robust current and anticipated levels of unrestricted reserves.
The port manages its financial profile to maintain a minimum of 2.0x net revenue coverage and 500 days cash on hand. Fitch views this policy as providing liquidity stability for bondholders and sees continued management to these levels as important to maintenance of credit quality given the lack of a cash-funded DSRF.
Financial Profile
Historical financial performance at POLA has remained strong despite the volatility of maritime trade in recent years. The port benefits from a strong balance sheet and high coverage ratios, highlighted by fiscal 2024 (unaudited) unrestricted reserves of $1.5 billion (equal to over 1,700 days cash on hand) and debt service coverage of 6.2x. Port leverage is also very low and offset by the port's sizable cash position, resulting in negative leverage.
Financial metrics under Fitch's rating case, which considers a hypothetical recessionary stress followed by moderate recovery, are appropriate overall for the 'AA' rating category, despite cash flows susceptibility to multiyear negotiated wage hikes and to higher-cost reimbursements to the city of Los Angeles.
PEER GROUP
Among peers in the 'AA' rating category, such as Port of Long Beach, CA and the Hawaii Department of Transportation (AA-/Stable), POLA demonstrates comparably strong cargo activity and robust coverage metrics. Leverage for all three ports is also consistent with the 'AA' rating category. Los Angeles and Long Beach share the San Pedro Bay and access to the Alameda Corridor.
RATING SENSITIVITIES
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;
--A sustained reduction in DSCRs falling below the 2.0x range in Fitch's rating case;
--Divergence from the current very low leverage levels to materially above 6.0x due to upward revisions to the capital program requiring significant debt funding, and/or a material depletion of port liquidity.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--Given POLA's already high rating level and sector-wide risks inherent to ports, upward rating action is unlikely.
TRANSACTION SUMMARY
The Harbor Department of the City of Los Angeles expects to issue approximately $219.3 million of series 2024 refunding revenue bonds. Bond proceeds, together with other available funds, will be used to refund and defease the series 2014 revenue bonds ($264.7 million in combined aggregate principal outstanding) and pay costs of issuance. The transaction is expected to achieve total debt service savings of $31.2 million or 11.8% of refunded par on a net present value basis, reflected in a reduction of annual debt service through 2044 and greater savings upfront in 2025-2026.
SECURITY
The bonds are secured by a senior lien on net revenues of the port.
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
Los Angeles Harbor Department (CA) has an ESG Relevance Score of '4' for Labor Relations & Practices due to follow-on impacts of labor relations between port tenants and longshoremen during periods of contract negotiations, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
GIG AST Model, v1.4.2 (1)
ADDITIONAL DISCLOSURES
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