OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BBB' to approximately \$111 million of Marina revenue bonds, series 2015, issued by the City of Long Beach, CA for the Alamitos Bay Marina Project. The Rating Outlook on the bonds is Stable.

Key Rating Drivers:

The rating reflects the Long Beach marina system's strategic location, near-capacity operations with waiting lists for slip rentals, and stable historical performance. It has both legal and some limited practical rate-making flexibility, currently charging rates that are below average when compared to area peers. Furthermore, average debt service coverage ratio (DSCR) of 1.43x in Fitch's rating case is consistent with the 'BBB' rating.

Strong Market Position: Long Beach marinas benefit from high demand for slip rentals at their three facilities, with historical overall occupancy of 96%-100% in the 2008-2013 period, 5%-10% higher than at other public and private marinas in the area. In fiscal year (FY) 2014 (ending Sept. 30) occupancy dipped to 94% due to renovation work, although revenues in the year increased by 5%.

Limited Rate-Making Flexibility: Long Beach slip rental rates increased 2.7% annually on average from 2009-2014, slightly below the 2.8% for comparable area marinas. Rates at Long Beach lag average rates at comparable marinas by approximately 6%, indicating some limited rate-making flexibility. However, Fitch notes the narrow nature of the revenue stream available to bondholders.

Infrastructure Needs Being Addressed: Long Beach's marinas were constructed in the 1950s and 1960s. Renovations on two of the three facilities were conducted between 2005 and 2007 and, following completion of on-going renovations to Alamitos Bay facilities, all marina facilities will have been renovated within the past decade and in a good state of repair.

Fixed-Rate Debt Structure: The proposed debt profile consists of all fixed-rate debt and debt service which escalates through 2031, then is level through maturity in 2045.

Moderate Coverage, Elevated Leverage and Liquidity: Leverage, defined as the ratio of net debt-to-cash flow available for debt service (CFADS), is initially elevated at 16x, although trapped excess funds should provide a strong mitigant in future years. Coverage is moderate, averaging 1.67x in the Fitch base case, and with a minimum of 1.57x. However, metrics are sensitive to occupancy rates as seen in the rating case which has average DSCR of 1.43x and a minimum of 1.05x. The \$7.9 million cash-funded debt service reserve fund (DSRF) requirement provides protection in years of thinner coverage.

Peers: Fitch does not rate any other marina facilities, and Fitch-rated parking facilities serve as a reasonable peer group. Rated parking facilities include Philadelphia Parking ('A+') and Miami Parking ('A'). Both credits benefit from more stringent rate covenants (1.5x), higher DSCR (2x-3x), and lower leverage (3x-4x), as well as dedicated cash balances with less exposure to leisure, which explain the higher rating category as compared with Long Beach Marina.

Rating Sensitivities:

Negative:
-- Occupancy rates that are measurably below historic levels;
-- Depressed market conditions, making rate increases difficult.

Positive:
-- Should performance outpace forecasts once improvements to Alamitos Bay facilities are completed, upward rating action is possible.

Transaction Overview:
The marina revenue bonds, series 2015, consist of \$50.6 million in new money bonds, and \$60.9 million in refunding bonds. The bonds are being issued to fund the remaining costs of the Alamitos Bay Marina Rebuild project, and to prepay Department of Boating and Waterways (DBW) loans outstanding which were used to finance past capital expenditure, including a portion of the Alamitos Bay improvements. Proceeds will also fund capitalized interest during construction, fund the DSRF, and cover costs of issuance. The debt is fixed rate and amortizes steadily with final maturity in 2045. No issuance on the subordinate lien is anticipated, nor are additional bonds.

The Long Beach marinas together make the largest municipally-run marina system in the nation, owned and operated by the Marine Bureau within the City's Parks, Recreation and Marine Department. The system has three marinas (originally built in the 1950s and 1960s): Shoreline, Rainbow and Alamitos Bay. Shoreline and Rainbow Marinas are located on Queensway Bay within walking distance of the Long Beach Convention Center and downtown Long Beach, while Alamitos Bay Marina is located in the Naples and Belmont Shore area near many beaches and amenities that appeal to boaters. Shoreline and Rainbow Marinas were rebuilt with concrete docks from 2005-2007, while Alamitos Bay is at the end of its physical design life. Reconstruction of four of its eight basins has been completed using DBW loans and city funds. The scope of remaining work on Alamitos Bay, which includes new gangways, docks, and other improvements, will reduce the current slip count of 1,962 by 307, but increase the large slip counts to maximize revenue. Slips less than 30' are reduced by 525 but slips greater than 35' are increased by 218.

Total slip revenue for the three Long Beach marinas grew at an average annual rate of 2.7% from 2004-2014. Revenues at Shoreline and Rainbow stabilized from 2007-2009 as occupancy normalized following construction projects during 2005-2007, while Alamitos Bay revenues have been affected by the on-going rebuild project over the past five years. In addition to slip revenue, other Marina Fund revenue is derived primarily from landside leases, including restaurants and other businesses, accounting for around \$1.8 million, or 8% of total revenue, annually. Operating expenses excluding debt service have been adequately managed by the city, growing at an average of 0.9% from 2004-2014.

Fitch considered several forecast scenarios, with the key revenue drivers being growth in slip rental rates and occupancy rates. In the Fitch base case, slip rental rates are assumed to increase 2% annually for all marinas through the projection period. During construction at Alamitos Bay, occupancy is assumed to fall to 67%-70%, while occupancy at Shoreline and Rainbow Marinas is not affected. Post construction, occupancy is assumed to stabilize at 95% for slips 30' and below, and at 98% for slips over 35' for all marinas. Resulting average revenue growth is 2.5% over the life of the bonds. Expenses are likewise grown at an average rate of 2.5%. Resulting average DSCR is 1.67x, with a minimum DSCR of 1.57x. Net debt-to-CFADS is initially high at 15.9x, decreasing to 7.73x by 2025. Fitch's rating case assumptions mirror the Fitch base case, but with a downturn included in the 2018-2020 period. Zero rate growth is assumed during this period, with 2% rate growth resuming in 2021. Occupancy is also assumed to increase more slowly, then resumes with Fitch base case rates from 2021 onwards. Resulting average revenue growth is 2.3%, generating an average DSCR of 1.43x, and a minimum DSCR of 1.05x. While coverage is constrained in the 2018-2020 timeframe, Fitch notes the presence of a cash funded debt service reserve as a mitigant to thin coverage. Leverage reduces more slowly in the Fitch rating case due to slower growth in net revenues, declining to 8.91x in 2025.

Fitch's scenarios demonstrate the sensitivity of net revenues to occupancy and slip rate growth, and elevated leverage is a concern. However, Fitch takes comfort in conservative occupancy assumptions during construction and conservative expense assumptions throughout the projection period. Additionally Fitch notes that the Marina System will generate cash after debt service is paid that may, in part, offset future debt, potentially causing a more rapid de-leveraging of the project on a net debt basis. The metrics are viewed to be consistent with a 'BBB' rating.

Security:
The bonds are secured by a pledge of net revenues of the city's municipal marina system. Net revenues are defined as the gross revenues of the marina system, less operating and maintenance expenses of the marina system.