OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the Port of Long Beach's \$194 million harbor revenue and revenue refunding bonds, series 2015 A-D, issued by the city of Long Beach, California. In addition, Fitch has affirmed its 'AA' rating on \$860 million in outstanding senior lien harbor revenue bonds, and its 'AA-' rating on the outstanding \$325 million subordinate TIFIA loan. The Rating Outlook on all bonds is Stable.

The ratings reflect the port's strong market position, with resilient revenues from long-term contractual guarantees that are sufficient to cover both the port's outstanding senior debt obligations and the subordinate TIFIA loan. Going forward, contractual guarantees should continue to provide revenue stability as the port proceeds with borrowing for its sizable \$3 billion long-term capital improvement plan (CIP). This plan, while costly, will help ensure the port's competitive position going forward. Strong financial metrics and considerable liquidity expected throughout execution of the CIP help support the port's ratings. The one notch differential on the TIFIA loan reflects its subordinate claim on revenues.

KEY RATING DRIVERS

Revenue Risk - Volume: Stronger
Strong Market Position: The Port of Long Beach is the nation's second largest container port, located on the west coast. Together with the neighboring Port of Los Angeles, it constitutes the San Pedro Bay Port Complex - the seventh largest port complex in the world. Fiscal 2014 20-foot equivalent units (TEUs) were 6.8 million, a 2.6% increase over 2013 but still 7% below fiscal 2007 peak levels. The recent west coast labor slowdown is expected to have depressed volumes in first quarter of calendar 2015, but shouldn't have longer term operational effects. Fitch also views port moves towards chassis management agreements as a positive development in alleviating port congestion.

Revenue Risk - Price: Stronger
Resilient Revenue Stream Despite Exposure to Volatility: With a large majority of operating revenues coming from the container business, the port is exposed to fluctuations in international trade and growing competitive pressures, which can lead to volume volatility. However, the port's revenues are largely insulated from trade-related revenue volatility due to long-term guaranteed contracts with most tenants, which accounted for nearly 75% of operating revenues in fiscal 2014.

Infrastructure Development/Renewal: Midrange
Modern Facilities, Sizable Capital Program: The port's capital program through 2024 is sizable at approximately \$3 billion. Additional borrowing of \$1.2 billion is anticipated as part of the capital program, with 80% anticipated in the next five years. Careful management of the plan's scope and cost relative to business demand so as to maintain the port's strong financial profile is important to rating maintenance, and Fitch notes that projects are proceeding well thus far. The port's terminal facilities are modern and contiguous, and the port benefits from favorable rail and highway connections within the LA region and to external markets through the Alameda Corridor.

Debt Structure (Sr): Stronger / Debt Structure (Sub): Midrange
Fixed Rate, Amortizing Debt: The port's senior bonds are all fixed rate and benefit from strong covenants. The subordinate TIFIA loan is also fixed rate, and benefits from a fixed amortization profile. The port's board has passed an ordinance requiring management to a minimum of 2.0x overall net debt service coverage ratio (DSCR) and 600 days cash on hand (DCOH), which serve to protect bondholders as additional leverage for the CIP is brought online.

Excellent Financial Profile: The port has a healthy balance sheet with a strong liquidity position, albeit lower than previous years due to use of cash for the ongoing CIP. 2014 liquidity of \$301 million represents 1,015 DCOH. Senior DSCR has remained above 3.0x since 2011, dipping slightly to 2.97x in 2014. Combined DSCR is projected to remain at or above 2.0x through the forecast period in management and Fitch Base cases, while coverage remains at or above 1.7x in Fitch's downside scenarios. 2014 port leverage is low at 1.95x net debt/cash flow available for debt service (CFADS) on all obligations (includes TIFIA loan), though this is expected to rise to the 4x-5x range as the full capital plan is executed.

Peer Analysis: The Port of Los Angeles ('AA'/Outlook Stable) is the closest peer to Long Beach, sharing the San Pedro Bay and access to the Alameda Corridor. Long Beach's liquidity compares favorably to Los Angeles', and current metrics are comparable, while Long Beach's capital plan going forward is more substantial than that of Los Angeles and requires additional borrowing.

RATING SENSITIVITIES

Negative:
--Higher than anticipated volatility or a steady downward trend in port container volumes.
--Financial forecasts indicating DSCR falling below the 2.0x management policy.
--Upward revisions to the capital program or debt funding that could indicate weaker debt metrics or measurably reduce port liquidity.

Positive:
--Given both the current rating level and the scope of the current capital plan, upward rating migration is not likely at this time.

TRANSACTION SUMMARY

The port is planning to issue \$194 million of series 2015 refunding and revenue bonds, including \$65 million in refunding bonds (series 2015 A and B) and \$129 million in new money (series 2015 C and D). Pricing is expected April 16. The refunding bonds will refund all or a portion of outstanding series 2005A (AMT) and B (non-AMT) bonds, totaling \$93 million of callable refunding candidates. No increase in annual debt service or extension of final maturity (2027) will result from the refunding. Projected present value savings for the refunding is \$12 million (12.8% of refunded par). Proceeds from the new money issuance will pay for and/or reimburse the Harbor Department for capital expenditures and will also be used to repay a portion of outstanding subordinate revolving lines of credit (\$120 million currently drawn). The bonds will be fixed rate with a final maturity of 2042. The port will not be setting aside cash reserves for the new money 2015 bonds; Fitch notes the port's overall strong cash balances somewhat mitigate the lack of a cash funded reserve.

Container volumes at Long Beach have improved since the recession, with 2014 showing an increase in throughput of 2.6% and building upon a healthy increase of 13.5% in 2013. The overall trend in TEUs remains one of growth, with the 2009 - 2014 CAGR at 2.8%. The first five months of fiscal 2015 have seen a meaningful decrease due to the west coast labor negotiations and slowdowns, which have affected container figures since the summer of 2014. Overall TEUs are down 7% through February (January and February saw 19%-20% declines), though management indicates March will show a catch-up effect as delayed cargo is processed. In fiscal 2014, the port's total operating revenues were \$357 million, a 3.1% increase over 2013.

Declines and recoveries in volumes have had limited impact on the port's rating, largely due to the revenue stabilizing nature of the port's long-term leases with its largest tenants. These long-term lease contracts collectively contain minimum payment provisions that are more than sufficient to cover both the port's outstanding senior debt obligations and the subordinate TIFIA loan (covering 1.85x on a net basis in 2014, and continuing to cover 1.4x or higher through 2019). Going forward, contractual guarantees are expected to increase as the middle harbor project comes online. Guarantees will continue to provide revenue stability as the port proceeds with expected future borrowing for its sizable long-term CIP. Management has indicated that key tenants desire to maintain long-term operations at the port, with OOCL having signed a 40 year lease for the middle harbor project.

Historically, the port has maintained high DSCRs, with net coverage at or above 3.0x both prior to the recession and since fiscal 2011. Coverage remains well above the rate covenant of 1.25x. Cash reserves are robust with \$301 million in unrestricted funds which translates to 1,015 DCOH. The port manages to a minimum of 2.0x net coverage and 600 DCOH, per an ordinance by the Board of Harbor Commissioners in October 2011. Fitch views this policy as providing liquidity stability for bondholders, and sees continued management to these levels as important to maintenance of credit quality. Fitch notes that potential contingent liabilities to ACTA for debt payments are legally subordinate to port revenue bonds. Long Beach has built shortfall payments of \$2 million and \$6 million into its forecasts for 2018 and 2019.

Both San Pedro Bay ports are well-positioned in terms of portside and inter-modal infrastructure, allowing them to accommodate local and non-local shipments. However, with up to 65% of cargo destined for inland markets, competition for this cargo may increase as the Panama Canal expansion project reaches completion in 2016. Under various scenarios that contemplate: drops in cargo volumes due to diversion or other events; funding of the full capital plan with an additional \$1.6 billion of debt obligations per management's projections; and careful management of operating and capital expenditures, forecasted DSCR for both senior and subordinate TIFIA obligations are expected to remain in excess of 2.0x in a base case scenario, and 1.7x in a combined downside case scenario which considers a drop in cargo in 2016 and revenues performing at minimum guarantee levels in the same year, with 4.5% recovery thereafter. Should volume stagnate or should the port fail to manage its expense profile prudently, the port may need to delay or defer certain elements of the capital program in order to maintain these coverage levels. Failure to maintain coverage above 2.0x in keeping with the port's debt ordinance will jeopardize the current rating.