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Rating Update:

MOODY'S DOWNGRADES TO Baa2 FROM Baa1 THE SUBORDINATE LIEN RATING ON ALAMEDA CORRIDOR TRANSPORTATION AUTHORITY'S BONDS AND CONFIRMS THE A3 SENIOR LIEN RATING; OUTLOOK IS NEGATIVE

21 Dec 2010

ACTA HAS $2.08 BILLION OF RATED DEBT OUTSTANDING

Ports
CA

Opinion

NEW YORK, Dec 21, 2010 -- Moody's Investors Service has downgraded Alameda Corridor Transportation Authority's (ACTA) subordinate lien bond rating to Baa2 from Baa1 and confirmed the A3 senior lien bond rating. The ratings have been removed from the watch list for downgrade and the outlook has been revised to negative.

RATINGS RATIONALE

The downgrade reflects less than sum-sufficient projected consolidated debt service coverage despite the recent container growth, the reduction in liquidity to pay a portion of subordinate debt service obligations and operating expenditures, and the expectation that a recovery in consolidated coverage will be challenged by an increasing subordinate lien debt service schedule. The A3 affirmation reflects the significant senior lien protection offered by the Port Shortfall Payments that provided nearly 2.00x bond ordinance coverage in FY2010. The negative outlook reflects the expectation that container growth will remain somewhat sluggish after an initial strong increase, therefore key liquidity may weaken as reserves are utilized to pay for operations and consolidated debt service coverage will likely remain below one times given the current escalating debt service schedule. The downgrade and negative outlook also incorporate the delays in the implementation of a debt restructuring plan that is necessary for coverage relief, and the short timeline remaining to successfully implement a plan before ACTA's target of the October 1, 2011 debt service payment date.

The A3 and Baa2 ratings acknowledge the benefits of the Authority's debt service reserve funds, the partial debt service support by the highly rated ports of Los Angeles and Long Beach (both rated Aa2), the essential nature of the asset in connecting containers from the ports to destinations nationwide, and the recent strong growth in cargo throughput. Moody's notes that the ports Shortfall Payment must cover Financing Fees which comprise only a portion of operating expenditures (which get paid after debt service) but that the ports may elect to provide additional payment to ACTA to fully support operations. The ratings also recognize the highly concentrated revenue stream provided by two off-takers, Union Pacific Railroad Company and BNSF Railway and the potential continued volatility of discretionary cargo coming through the ports to utilize the corridor.

LEGAL SECURITY: The senior and subordinate lien bonds are secured by a gross pledge of a combination of use fees and container charges, port advances, and some interest earnings. This project finance debt provides no recourse to the project operators, the BNSF Railway Company (BNSF Corporate Issuer Rating A3/Stable Outlook) and Union Pacific Railroad (Union Pacific Corporate Issuer Rating Baa2/Stable outlook), and only limited recourse to the ports of Los Angeles and Long Beach. The railroads are required to pay user fees and container charges under a use and operating agreement (UOA). Additionally, the UOA requires the ports to pay up to 40% of debt service (20% each) for those debt service payments in which there is an actual shortfall in use fee and container charge revenues. Moody's notes that the Use and Operating Agreement between the ports, the railroads, and ACTA provides a formal obligation to support debt service, debt service reserve funds, and Financing Fees down to the 1st subordinate lien level which includes certain monitoring and collection costs. Therefore the Shortfall Payment is required to cover a portion, but not all of operating expenditures , although the ports may elect to provide additional payment to ACTA to fully support operations.

Bondholders have no mortgage interest in the property, only a lien on the revenues associated with the operation of the rail corridor. Each railroad is obligated pursuant to the operating agreement to pay use fees and container charges. No charges are levied should the corridor be subject to a blockage of more than five consecutive days though this is offset by one year of business interruption insurance.

While there is no rate covenant, there are provisions for CPI-based increases in the use fees and container charges of between 1.5% and 4.5% per year. The additional bonds test for the senior lien is a fairly standard 125% of maximum annual debt service of outstanding and proposed debt based on historical 12 consecutive out of 18 months revenues or based on projected future revenues as certified by a consultant. The additional bonds test for the junior lien is similar to the senior lien though with a significantly weaker, but not atypical, sum sufficient requirement. Both additional bonds tests allow for the use of the Port Shortfall Payments in calculating coverage. The senior and subordinate bonds are additionally secured by a separate debt service reserve fund (DSRF) set at the lesser of maximum annual debt service, 125% of average annual debt service or 10% of original par. The indenture also requires a reserve account that is annually funded at $15 million to be used for non-rail O&M, capital expenses and optional additional capital improvements. The senior lien DSRF is satisfied with a surety policy and the subordinate lien DSRF is fully cash-funded. While the surety policy represents a weakening of this credit factor, it is somewhat balanced by the ports' shortfall payments which would include up to 40% of a deficiency in the debt service reserve fund requirement.

INTEREST RATE DERIVATIVES: None

STRENGTHS

* ACTA provides an essential link between the ports and the transcontinental railroad system in the movement of discretionary cargo across the nation

* ACTA's FY2011 container throughput has grown nearly 20% in the first four months; containers at the ports increased 23% year-over-year from July through November

* Ports are strong credits and provide aggregate additional support equal to 40% of annual debt service

* Satisfactory available liquidity, and fully cash-funded debt service reserve for subordinate lien bonds, provide near-term cushion during current economic downturn and revenue shortfalls

* Strength and diversity of the Los Angeles metropolitan area market which provides a stable demand base for cargo

* Sound management that has proactively monitored container and revenue levels, responding by deferring capital expenditures and reallocating reserves for debt service payments

CHALLENGES

* Despite recently strong container growth, future growth is expected to moderate as inventories are filled and economic downturn continues

* Container declines have reduced revenues and debt service coverage is expected to be below 1.0x in FY2010, although the deficiency will be made up with available reserves

* The sharply increasing debt service schedule and slow revenue recovery will significantly pressure future coverage levels

* The ports' formal commitment to provide Shortfall Revenues does not include all operating expenditures, which are paid after debt service

* Construction and Operating Reserves have been tapped for debt service and operating expenditures, reducing liquidity levels that are critical to credit quality

* Cargo using the corridor is overwhelmingly discretionary (i.e., headed for markets outside the regional market) therefore more volatile

* Limited ability to raise rates; rate increases are limited to 1.5% to 4.5% annual CPI increases and further increases would require a renegotiation of the UOA.

* Concentration in two off-takers poses risk of revenue volatility

RECENT DEVELOPMENTS

As a result of the economic downturn, ACTA's container volumes declined 23% from peak to trough between FY2007 and FY2010 to 3.9 million loaded, waterborne twenty-foot equivalents (TEUs). Similar declines were experienced at the Port of Los Angeles (rated Aa2) and the Port of Long Beach (rated Aa2); total container throughput at the ports declined 20% between July 2007 and June 2010 to 12.76 million combined. In FY2011 (ending June 30) year-to-date, however, TEUs have gained a significant 25% at the ports and 19.5% for ACTA through November. Container levels began to stabilize and return to growth in early 2010, and FY2010 TEU levels outperformed ACTA's mid-fiscal year projections, which had assumed an 8% year-over-year decline compared to the 5% realized. The recent economic decline reinforces the expectation that TEU growth trends at ACTA may be more volatile and slower to recover than at the ports, as a much larger percentage of containers handled at ACTA is discretionary cargo bound for destinations outside the LA metro area. In FY2010, ACTA captured 32.8% of all container traffic generated by the Ports of LA and Long Beach, compared to an historic average of 36.4%.

On a bond ordinance basis, which includes the available port Shortfall Payments for up to 40% of debt service, FY2010 senior lien and total debt service coverage were 1.98x and 1.32x, respectively.

Excluding port payments, FY2010 total debt service coverage decreased to 0.92x from 1.03x in FY2009 due to the 5.7% decline in revenues and the 5% increase in subordinate lien debt service. While the authority has the option to request a Shortfall Payment from the ports, it has opted to use $10 million of available construction reserves to offset the revenue deficiency. FY2010 senior lien coverage also decreased slightly to 1.37x from 1.46x in FY2009. Unlike subordinate lien debt, the senior lien debt service schedule is relatively flat through 2015.

Maintenance of way charges are allocated directly to the railroads on a monthly basis, separate from Use Fees and Container Charges, and cover a portion of operating expenditures (35% in FY2010). While these fees could be increased to cover the full maintenance of way expenditures (45% of FY2010 expenditures), the remaining salaries and administrative costs are paid from Use Fees and Container Charges. In FY2010, the authority used approximately $6 million of its Administrative Cost Fund to pay operating expenditures, and the remaining balance as of October 31, 2010 was $11.6 million. The ports are not formally obligated to make Shortfall Payments to cover all operating expenditures, therefore the reduction in liquidity and below sum-sufficient coverage could negatively impact ACTA's ability to cover future operations.

As of October 2010, ACTA's liquidity position includes a fully cash-funded debt service reserve fund ($100.5 million) for the benefit of the subordinate lien debt, nearly $5 million of debt service reserves for the senior lien, $37 million of construction funds, and $44.8 million of available cash. Construction reserves and available liquidity has declined, however, from October 2009 levels which included $50.6 million of construction reserves and $56 million of available cash. Liquidity declined due to the use of reserves to pay debt service and operations, as well as lower revenues to replenish reserves at year end. ACTA also benefits from commitments by the Port of LA and Long Beach to cover up to 40% combined of annual debt service expenditures, which would equal $37.9 million in FY2011. Additionally, a call on the shortfall payments would trigger a one-time $1/TEU fee increase to the railroads, providing an estimated additional $5 million in revenues for debt service coverage. The shortfall payments can be requested prior to a draw on the debt service reserve fund, and both ports have strong liquidity positions to support this commitment. ACTA has never tapped the ports for their pledge support, and Moody's expects that any payments would be received in a timely manner given the close management ties between the entities and sound notification mechanics that are in place.

In light of the recent declines in TEUs and expected protracted recovery period, ACTA is considering a restructuring of some outstanding debt service to reduce significant debt service increases over the next five years. As currently scheduled, aggregate annual debt service will increase a significant 40% from $94.7 million in FY2011 to $132.5 million in FY2015. A further review of ACTA's credit rating is expected should ACTA complete a restructuring plan.

Since the corridor project itself is completed, the authority's capital program is currently limited to regional transportation projects, including improvements to State Route 47 and other dock-related improvements. Moody's recognizes that revenues from the corridor could not be used for these improvements, which would likely aid in the movement of containers through the region.

OUTLOOK:

The negative outlook reflects the expectation that container growth will remain somewhat sluggish after this initial strong increase, and therefore key liquidity may weaken as reserves are utilized to pay for operations and consolidated debt service coverage will likely remain below one times given the current escalating debt service schedule. The negative outlook also incorporates delays in ACTA's implementation of a debt restructuring plan, and the short timeline remaining to successfully implement a plan before ACTA's targeted date (October 1, 2011). Expectations for a protracted and sluggish recovery are consistent with Moody's current global macroeconomic scenario ("Moody's Global Financial Risk Perspectives, January, 2010, Global Macro-Risk Scenarios 2010-2011"). The outlook also considers the timing, structure and implementation of the authority's plans to restructure portions of the outstanding debt to address the debt service increases over the next several years.

What would change the rating - UP (remove the negative outlook):

Faster than expected container recovery that results in strengthened coverage metrics and replenished liquidity to levels that would balance any future cargo volatility given the authority's low rate-raising flexibility.

What would change the rating - DOWN:

Delayed or slow recovery of cargo flow that results in a continuation of less-than-sum-sufficient debt service coverage and further depletion of available liquidity.

KEY STATISTICS

Senior Lien Debt Service Coverage (bond ordinance):

FY2010 (excluding shortfall payment): 1.98x (1.37x)

FY2011 projected (excluding shortfall payment): 2.24x (1.60x)

Senior and Subordinate Lien Debt Service Coverage (bond ordinance):

FY2010 (excluding shortfall payment): 1.32x (0.92x)

FY2011 projected (excluding shortfall payment): 1.41x (1.01x)

Current Cash Position (as of October 31, 2010):

Unrestricted cash and discretionary reserves: $44.8 million

Construction funds and bond proceeds: $37 million

Debt Service and Debt Service Reserve Funds: $105.5 million

Rated Debt Outstanding (as of June 20, 2010):

Senior Lien:

1999 Series A Bonds: $509.3 million

1999 Series C Bonds: $574.8 million

Subordinate Lien:

1999 Series D Bonds: $79.2 million

2004 Series A Bonds: $654.6 million

2004 Series B Bonds: $258.2 million

RATING METHODOLOGY

The principal methodology used in this rating was: bond ratings were assigned by evaluating factors believed to be relevant to the credit profile of the issuer such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) and the issuer's management and governance structure related to payment.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Baye B. Larsen
Analyst
Public Finance Group
Moody's Investors Service

Kristina Alagar Cordero
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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MOODY'S DOWNGRADES TO Baa2 FROM Baa1 THE SUBORDINATE LIEN RATING ON ALAMEDA CORRIDOR TRANSPORTATION AUTHORITY'S BONDS AND CONFIRMS THE A3 SENIOR LIEN RATING; OUTLOOK IS NEGATIVE
No Related Data.
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