OREANDA-NEWS. Fitch Ratings has affirmed the Harbor Department of the City of Los Angeles, California's (Port of Los Angeles, or POLA) $951 million of revenue bonds at 'AA'. The Rating Outlook is Stable. The bonds are secured by a senior lien on net revenues of the port.

RATING RATIONALE

The 'AA' rating reflects POLA's leading market position, with stable revenues underpinned by long-term contractual guarantees adequate to cover most outstanding senior debt service. Strong financial metrics and considerable liquidity expected throughout execution of the manageably sized CIP further support the rating. Although management does not expect to issue long-term debt to fund its CIP, the port may draw from its commercial paper (CP) program. Fiscal 2015 leverage (net debt to cash flow) of 2.1x, debt service coverage of 3.2x, and 692 cash on hand (DCOH) compare favorably to the indicative 'AA' category in Fitch's criteria.

KEY RATING DRIVERS

Revenue Risk- Volume: Stronger
Very Strong Market Position: POLA is well positioned as the largest port in the United States with a large and diverse local market in a geographically strategic location. The port also benefits from infrastructural advantages that make the port attractive for onward shipping to discretionary markets. These strengths are modestly offset by exposure to volatile international trade as well as labor risks, and throughput levels remain largely dependent on Far East imports.

Revenue Risk- Price: Stronger
Resilient Revenue Stream: A large majority of operating revenues are derived from the container business; however, long-term leases with minimum payment levels to most key tenants mitigate cargo volume risk. Through fiscal 2020 the port estimates annual minimum lease revenues of about $300 million (65% of fiscal 2015 pledged revenues).

Infrastructure Development/Renewal: Stronger
Flexible Capital Program: The port's five-year capital program is modestly sized at $803 million with no long-term debt issuances planned. The port's terminal facilities are modern and contiguous, and have excellent access to intermodal transportation facilities. 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.

Debt Structure: Stronger
Conservative Debt Structure: All of the port's outstanding bonds are fixed rate obligations with stable annual debt service requirements, though the port may also utilize a portion of its $200 million CP program to fund its CIP. Covenants and reserve requirements are in-line with highly rated U.S. port credits.

Financial Metrics
Strong Financial Profile: The port benefits from a strong balance sheet and high coverage ratios highlighted by fiscal 2015 unrestricted reserves of $442 million and debt service coverage of 3.2x. Port leverage is also low with 2.1x net debt/cash flow available for debt service. Although Fitch expects DSCR to weaken moving forward based on escalating debt service and rising O&M growth, resulting financial metrics are still appropriate overall for the 'AA' rating category.

Peers: Amongst its peers in the 'AA' category, such as the Port of Long Beach (CA), POLA demonstrates comparably strong cargo activity and robust coverage metrics. Leverage for both ports is also consistent with criteria for 'AA' category ratings.

RATING SENSITIVITIES

Negative - Operational Underperformance: Substantial changes in container tonnage or a marked shift in the diversity of revenue sources supporting the port.

Negative - Metrics and Leverage: A sustained reduction in debt service coverage ratios falling below the 2.0x range or divergence from current leverage levels due to changes in the port's cost structure and scope of capital plan.

Positive - Given the port's already strong profile and rating level, upward rating action is unlikely.

SUMMARY OF CREDIT

POLA is the nation's largest container port, and operational performance remains healthy with a solid recovery since the previous recessionary period. Container volumes are up a healthy 2.9% for the first nine months of fiscal 2016, reflecting throughput normalization after a 2015 labor slowdown and continued economic growth. Management projects TEUs for fiscal 2016 will rise to 8.5 million, reflecting a 3.5% year-over-year gain. Imported cargo from Asia, particularly China, drives a substantial portion of overall volumes.

Volume risks in the near term are focused on several areas including the economies in China and the U.S., the impacts from the recent unrest where some shippers have diverted discretionary cargo to other ports, and the eventual opening of the expanded Panama Canal. Nevertheless, container volumes have been resilient over the longer term and management currently anticipates intermediate-term growth of about 3% annually. Fitch views management's projections as reasonable given expectations of further economic growth and several strategic measures management is pursing to further enhance the port's already competitive position. Still, macro factors could cause the port to either miss or exceed these growth targets.

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 operate under long-term lease contracts that collectively contain minimum payment provisions that can cover a high proportion of annual debt service requirements.

One long-term risk is the exposure to discretionary cargo, a key component of POLA's shipping activity, representing nearly half of shipping volumes in recent years. In addition, 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. This risk is compounded by lingering concerns over west coast labor relations following labor unrest in fiscal 2015. Fitch has assessed some stresses to port activity and views the financial cushion to be adequate to manage some diversion of maritime activity.

Historical financial performance at POLA has remained strong despite the volatility of maritime trade, with audited fiscal 2015 debt service coverage at 3.23x. Minimum annual guarantees from port tenants provided for nearly $300 million in 2015, accounting for about two-thirds of total port operating revenues and providing over 1.0x debt service coverage alone on a net revenue basis. Minimum annual guarantees from port tenants are projected to continue to provide about $300 million from fiscal years 2016 - 2020. Debt service coverage remains strong at or above 2.0x in the sponsor and base cases, and remains above 2.0x in all but one year of Fitch's rating case, which includes certain significantly conservative elements. Cash reserves are also robust with $442 million in unrestricted funds, or 692 DCOH.

The port maintains prudent financial practices including a minimum target of 2.0x coverage on its revenue bonds as well as maintaining a high level of minimum available reserves. Further, the port's financial exposure to Alameda Corridor Transportation Authority (ACTA) has historically remained low given ACTA's past debt restructuring actions coupled with POLA's strong cash flow and liquidity position. Going forward, both POLA and the Port of Long Beach could be required to step in with additional ACTA shortfall payments should a trend of weaker container throughout growth trends continue. A restructuring of ACTA's debt earlier this year makes it less likely POLA will have to make any such shortfall payments over the next 10 years.

The port's capital improvement plan (CIP) is manageable at $803 million through fiscal 2020 and the updated plan has contracted from the prior $1.3 billion CIP due substantially to the completion of prior large capital projects. The vast majority of projects under way are reported by management to be running on time and on budget. The capital program contemplates that grants and cash funding will fully cover capital costs without the issuance of long-term debt; however, the port may draw upon its $200 million commercial paper program.

The Fitch base case assumes a 2.5% annual growth rate in containers, a 50 basis point reduction to the port's intermediate-term growth projections, while the rating case assumes a lower growth rate of 0.7% to reflect a weaker economic environment and cargo diversion from the opening of the expanded Panama Canal. Given the modest future leverage and high fund balances in place, current port leverage of just 2.1x net debt/CFADS will likely remain at or below 3.0x under both Fitch cases. The leverage position is considered to be low when compared to other major U.S. ports.