Alameda Corridor Transportation Authority, CA — Moody’s revises outlook to positive, affirms A3 senior, Baa2 subordinate and Baa2 second subordinate ratings on ACTA’s (CA) $2.1 billion of bonds

Rating Action: Moody’s revises outlook to positive, affirms A3 senior, Baa2 subordinate and Baa2 second subordinate ratings on ACTA’s (CA) $2.1 billion of bondsGlobal Credit Research – 27 Dec 2021New York, December 27, 2021 — Moody’s Investors Service has affirmed the A3 senior, Baa2 subordinate and Baa2 second subordinate bond ratings of Alameda Corridor Transportation Authority (“ACTA”). Concurrently, Moody’s has revised the outlook to positive from stable.RATINGS RATIONALEThe positive outlook reflects 1) ACTA’s generally stable to increasing revenue trend over the last 20 years, despite challenges to volumes, which supports debt servicing capacity; 2) strengthened financial flexibility of the two ports, which jointly govern ACTA, determine its debt structure and are obligated to pay 40% of debt service; and 3) ACTA’s plan to further restructure debt over the next several years, which has the potential to result in a more consistent and sustainable amortization profile.ACTA’s ratings (senior revenue bonds rated A3; subordinate and second subordinate revenue bonds rated Baa2) reflect the essential role of ACTA’s rail corridor in the movement of intact intermodal rail containers for the ports of Los Angeles (Los Angeles Harbor Department, Aa2 stable) and Long Beach (Long Beach Harbor Department, Aa2 stable), which jointly own ACTA.ACTA has an effective monopoly for serving intact intermodal rail containers entering and exiting the port complex, which has a substantial market position and handles one-third of US container volume. Roughly 35% of all loaded containers at the port complex move on ACTA’s corridor, which is high for on-dock rail and illustrates the significance of this mode for the ports. Through the COVID pandemic, ACTA has experienced good growth and maintained share within the port complex, reflecting the important role rail has played in both facilitating shipments to and from inland locations and relieving congestion on marine terminal gates.ACTA’s ratings are supported by agreements with the ports of Los Angeles and Long Beach for each port to make shortfall advances on a several basis for 20% of annual debt service requirements, providing aggregate backing for 40% of ACTA’s annual debt service. The port shortfall obligations are additionally supported by restricted liquidity at ACTA in the form of a 12-month debt service reserve fund for all series of bonds.The ratings reflect ACTA’s ongoing active management of its debt maturity profile and the significant flexibility ACTA retains to align debt service with project revenue given an operating agreement that extends to 2062, relative to a current final scheduled maturity in 2037, along with a large share of callable debt that can be restructured.RATING OUTLOOKThe positive outlook reflects our expectation that ACTA will 1) continue to experience healthy traffic activity, supported by a strong outlook for container trade and 2) restructure debt to resolve the need for shortfall advances, which may begin to transition the profile toward more meaningful debt reduction in advance of the expiration of the operating agreement. As ACTA’s revenue and the port support have provided a relatively stable 1.4x coverage level, and there is significant capacity beyond 2037 to accommodate debt service, the positive outlook reflects the potential for the planned restructuring to produce a more sustainable and consistent amortization profile.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Sustained period of corridor volume growing above projections and creating financial headroom to comfortably manage the 2026 increase in debt service- Evidenced willingness of both ports to make large, repeating shortfall advances to bridge the increased debt service requirements in 2027 and beyond- Debt service payment schedule that substantially reduces principal outstanding well in advance of the expiration of the operating agreementFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Sustained underperformance of corridor volume relative to required breakeven levels, resulting in growing contingent obligations for the two ports and increasing reliance on market access for debt restructuring- Structurally weakened market position of San Pedro Bay ports resulting in diminished competitive standing and financial strength- Significant deterioration in credit quality of railroads – BNSF and Union Pacific – party to the operating agreementLEGAL SECURITYThe Authority’s bonds are secured primarily by Use Fees and Container Charges from the Union Pacific and BNSF railroads and Shortfall Advances from the Ports of LA and Long Beach. There is no direct obligation of the railroads or the ports to pay the Authority’s bonds. Bondholders also benefit from series-specific debt service reserve funds funded to the standard three prong test. There is no rate covenant.Additional senior lien new money bonds may be issued if ACTA delivers (i) a certificate showing pledged revenues projected by an independent consultant will at least equal 125% of MADS on all senior lien bonds including the proposed issuance for any twelve consecutive months out of the eighteen months prior to the proposed issuance or (ii) pledged revenues (referred to as “Dedicated Revenues” in the Master Trust Indenture) projected by an independent consultant from proposed issuance through final maturity of all senior lien bonds will at least equal 125% of debt service on all senior lien bond including the proposed issuance. Additionally, ACTA must deliver a certificate showing pledged revenues projected by an independent consultant from proposed issuance through final maturity will at least equal 110% of on all senior lien bonds, including the proposed issuance. Further, the Authority must obtain written consent from the Series 2012 Lender and bond insurers on the Series 2004 and 2013A Bonds.Additional senior lien refunding bonds may be issued provided the Authority delivers a certificate showing that MADS post issuance will not exceed MADS prior to issuance. Further, as long as the Series 2012 bonds are outstanding, the authority must also certify that (i) aggregate debt service on all senior lien bonds will not increase or (ii) Dedicated Revenues will be at least 125% of senior lien debt service in each year in which the Series 2012 bonds are outstanding.Additional first subordinate lien new money bonds may be issued if ACTA delivers (i) a certificate showing Dedicated Revenues projected by an independent consultant will be at least equal to 110% of MADS on all outstanding bonds including the proposed issuance for any twelve consecutive months out of the eighteen months prior to the proposed issuance or (ii) Dedicated Revenues projected by an independent consultant from proposed issuance through final maturity of all first subordinate lien bonds will be at least equal to 110% of on all outstanding bonds including the proposed issuance.Additional first subordinate lien refunding bonds may be issued provided the Authority delivers a certificate showing that MADS post issuance will not exceed MADS prior to issuance.The Master Trust Indenture currently permits ACTA to issue second subordinate lien bonds without meeting any debt service coverage tests, provided the bonds do not include provisions for acceleration, but concurrent with this sale, ACTA will adopt a supplemental indenture prescribing a new additional bonds test for second subordinate lien bonds requiring either (1) Dedicated Revenues through the date of final maturity of all second subordinate lien bonds, including the proposed issuance, will be at least equal to 105% of debt service on all outstanding bonds; or (2) MADS post issuance will not exceed MADS prior to the issuance.PROFILEAlameda Corridor Transportation Authority is a joint powers authority formed by the cities of Long Beach and Los Angeles in 1989. The Alameda Rail Corridor was financed and built and is operated by the authority. It is a multiple-track rail system located in southern Los Angeles County, California, running from the ports of Long Beach and Los Angeles 20 miles north, linking the ports’ facilities with the transcontinental rail routes near downtown Los Angeles. The corridor consolidated freight rail traffic from approximately 90 miles of preexisting rail lines onto an integrated system separated from non-rail traffic. Operations began in April 2002.METHODOLOGYThe principal methodology used in these ratings was Generic Project Finance Methodology published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244806. 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