The Port of Los Angeles may face threats from the Panama and Suez canals and ports in Canada and Mexico, but in terms of its ability to make payments on more than $700 million in debt, bondholders should sleep well at night.
In affirming a high-quality AA rating to the port’s revenue bonds today, Fitch Ratings described a port with a “very strong market position” and a “resilient revenue stream despite exposure to international trade.”
Noting the potential for diversion of discretionary cargo, Fitch said the port’s secure rating was tied in part to its long-term tenant contracts with marine terminal operators. Long-term guaranteed contracts make up 66 percent of the port's fiscal year 2013 revenue, which “mitigate cargo volume risk.” Fitch said: “The port’s financial position is supported by strong and stable revenue sources through long-term lease agreements with most tenants.” It noted that minimum annual guarantees from port tenants provided $278 million in 2013 and noted that this figure alone can pay the port’s debt service. Fitch said it “views the financial cushion to be very strong to manage the potential for some diversion of maritime activity.”
In assessing the creditworthiness of $764.5 million in revenue bonds, the ratings agency did not gloss over the potential for diversions away from Los Angeles and Long Beach, for whom half of its container volumes can be moved through other ports at the discretion of the shipper.
“One long-term risk is the fact that discretionary cargo is a key component of [the Port of LA’s] shipping activity, representing half of shipping volumes in recent years,” it said, adding that “cargo leakage to other maritime facilities will be an ongoing and perhaps increasing risk factor as the Panama Canal expansion project reaches completion in several years.”
The Panama Canal Authority said this week that its expansion project, which would allow 12,000-TEU ships to pass through its lock system, versus a maximum of 5,500-TEU ships today, is expected to be completed in 2015 despite a public payments dispute with its contractors. However, the canal has admitted that work on the third set of locks has slowed due to the dispute, thus Fitch could be correct in saying that completion may be years away.
Not only is the Panama Canal a threat to Los Angeles, so is the Suez. Carriers are deploying 8,000-TEU ships or larger on the route from Asia to the North American east coast via the Suez, as the tonnage is available and carriers are not willing to wait for the Panama Canal expansion to be completed. As production of some commodities like footwear shift from China to lower wage nations such as Bangladesh and Vietnam, the Suez route becomes more attractive.
The market share of the ports of Los Angeles and Long Beach, which Fitch describes as the fifth largest port complex in the world, has been relatively stable. As a share of all west coast ports, including Vancouver and Prince Rupert in Canada and Lazaro Cardenes in Mexico, LA-LB had a share of 61.3 percent, 59.7 percent and 60.6 percent in the first three quarters of calendar year 2011, 2012 and 2013, respectively, according to port-published data collected by JOC.
In terms of total major ports in the U.S., LA-LB had market shares of 41.6 percent, 41.1 percent and 41.8 percent in the first three quarters of calendar years 2011, 2012 and 2013, respectively, according to port figures.