Fitch Ratings has affirmed the Alameda Corridor Transportation Authority's (ACTA) senior bonds at 'A', subordinate revenue bonds at 'BBB+' and second subordinate revenue bonds at 'BBB'.

The Rating Outlook on all of the bonds is Stable.

ACTA also has $73 million in an unrated series 2012 RRIF loan, which is on parity with the rated senior revenue bonds.

RATING ACTIONS

Entity / Debt

Rating

Prior

Alameda Corridor Transportation Authority (CA)

Alameda Corridor Transportation Authority (CA) /General Revenues - First Lien/1 LT

LT

A

Affirmed

A

Alameda Corridor Transportation Authority (CA) /General Revenues - Second Subordinated Obligations/2 LT

LT

BBB

Affirmed

BBB

Alameda Corridor Transportation Authority (CA) /General Revenues - Subordinated Obligations/2 LT

LT

BBB+

Affirmed

BBB+

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VIEW ADDITIONAL RATING DETAILS

RATING RATIONALE

The ratings reflect a vital rail corridor that handles nearly a third of the throughput for the San Pedro Bay ports (SPB ports), which consist of Port of Los Angeles and Port of Long Beach (both rated AA/Stable for the senior lien). Backstop commitments from the ports provide some revenue stability and mitigate the authority's exposure to throughput volatility and rate adjustment limitations linked to inflation. Credit concerns include ACTA's heavily back-loaded debt structure, with shortfall advances likely by fiscal 2027 absent additional debt refunding or the use of cash balances.

The 'A' rating on the senior lien reflects superior coverage levels, stronger structural protections, and an expected lack of dependence on shortfall advances to cover obligations at this lien level, while acknowledging the open nature of the lien for future restructuring transactions. The first subordinate and second subordinate bond ratings of 'BBB+' and 'BBB', respectively, reflect the liens' subordinated positions within the ACTA debt structure, lower coverage levels and weaker structural protections.

KEY RATING DRIVERS

Revenue Risk - Volume - High Midrange

Essential Corridor, Elevated Volatility: The corridor provides an essential intermodal transportation link between the SPB ports and two of the nation's largest railroads, Union Pacific and BNSF. However, ACTA's loaded throughput has exhibited slightly more volatility than that of the SPB ports due to its exposure to trans-loading and shipment of intermodal cargo to some lower growth regions beyond the Southern California basin.

ACTA's import cargo is also somewhat susceptible to diversion, though limited diversion is expected given timing efficiencies provided by the SPB ports and the railroads. ACTA's share of SPB port imports has declined modestly in recent years to approximately 30% of total TEUs. Positively, volume related elasticity to rate increases has been low and is expected to remain low going forward given ACTA's current rate framework.

Revenue Risk - Price - Midrange

Moderate Rate-Making Ability: ACTA has a moderate ability to modify rates as evidenced by its rate framework that tracks annual rate increases to changes in the regional consumer price index (CPI), subject to a minimum threshold of 1.5% and a maximum threshold of 4.5%. This protects against very low or negative inflation but limits the authority's ability to offset sharp declines in volume with commensurate rate increases.

Periods of lower inflation growth are somewhat mitigated by the allowance of shortfall advances by the SPB ports, which have an obligation to cover up to 40% of any debt service payment and financing fees. ACTA is also able to pass through many maintenance and operations (M&O) costs directly to the BNSF and Union Pacific railroads, though ACTA remains responsible for its own administrative costs and capital refurbishment through the reserve account.

Infrastructure Dev. & Renewal - Stronger

Minimal Capital Needs: ACTA's capital improvement planning mechanisms are strong and reflect the anticipated needs of both the ports and the railroads. The corridor is in good condition and is operating well above medium-term throughput forecasts, resulting in modest future expected capital needs. No additional borrowing for capital-related projects is expected over the near term.

Debt Structure - 1 - Stronger; Debt Structure - 2 - Midrange

1 -	Senior Debt; 2 - First and Second Subordinate

Multi-Liens, Back-Loaded Debt Structure: ACTA's debt structure is fixed-rate under three lien levels and largely back-loaded, with approximately 57% of total outstanding debt in the form of capital appreciation bonds. The lower debt structure assessment for ACTA's two subordinate liens reflects the liens' subordinated position within the overall debt structure, weaker structural features, and reliance on shortfall advances to meet obligations by 2027 absent additional restructuring.

Financial Profile

ACTA benefits from solid senior 10-year rating case average debt service coverage ratios (DSCRs) of 3.4x, and adequate first subordinate and second subordinate 10-year average DSCRs of 1.9x and 1.4x, respectively (including the port's contingent obligations and ACTA's administrative costs). Fitch views additional financial cushion necessary to offset ACTA's increased volume and price risk. Therefore, ACTA's coverage ratios are at the upper end of Fitch's indicative guidance for ports.

Rating case year 10 leverage (including contingent obligations and administrative costs) is high for the senior and first subordinate lien at 8.9x and 11.3x, respectively, and elevated on an all-in basis at 16.4x. Higher leverage is mitigated by ACTA's relatively modest capital needs, which should allow for progressive deleveraging through final maturity.

PEER GROUP

Compared to 'A' category rated ports within Fitch's portfolio, ACTA has a lower percentage of minimum annual guaranteed revenues, but higher Fitch rating case coverage. This is due to the additional cushion necessary to offset ACTA's lower degree of revenue stability.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Sustained throughput underperformance not adequately offset by rate increases, resulting in consolidated DSCR ratios below 1.4x;

Material changes in the credit quality of the two port counterparties, or an inability of the railroads serving ACTA to cover O&M.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Upward rating migration is unlikely in the near term due to ACTA's dependence on revenue growth to avoid shortfall advances and its elevated consolidated leverage.

CREDIT UPDATE

ACTA's 28% capture rate in fiscal 2023 has rebounded to levels consistent with its historical average. ACTA's fiscal 2023 (ending June 30) TEU volumes decreased by 1% from the prior year, a modest decrease after a 16% drop in fiscal 2022. As much of ACTA's cargo serves discretionary rather than local demand and leaves the local area via rail, Fitch views ACTA's cargo base as more exposed to gateway shifts by shipping lines. YTD 2024 (eight months through February) ACTA volumes have increased by 3.1% when compared with the same period in 2023.

ACTA's fiscal 2023 use fee and container charge revenues increased 2.4% over the prior fiscal year, and total operating revenues increased nearly 4%. This reflects a combination of the CPI-driven 4.5% increase in rates coupled with the decrease in container volumes. Positively, fiscal 2023 revenues are 3.2% higher than in Fitch's prior year base case expectations for fiscal 2023. Fiscal 2023 administrative expenses, excluding depreciation and maintenance-of-way expenses, increased 26% over the prior year, but this follows a 19% decrease in fiscal 2022, and represents a modest 2% increase over fiscal 2021. Fiscal 2023 DSCR for all three liens were slightly higher than in Fitch's prior base case expectations due to increased use fee and container charge revenues.

Issuances in 2022 and early 2024 helped alleviated some of ACTA's near-term shortfall advances by reducing annual debt service through 2026. As a result, ACTA does not require further restructuring transactions over the next two years but may take advantage of market conditions to further reduce other shortfalls. The 2024 transaction resulted in an extension in overall maturity of the debt by one year, but repayment remains within the term of ACTA's operating agreement (expires fiscal 2062). Fitch views positively the long tail currently provided by the use permit and the presence of call options within ACTA's debt structure, which should provide for sufficient financial relief via future refunding and/or restructuring transactions.

FINANCIAL ANALYSIS

Fitch's base case incorporates YTD growth for fiscal 2024 and assumes fees grow by 4% per annum through fiscal 2033. Administrative costs grow by 2% per annum for the ten-year forecast period. Under these assumptions, Fitch's base case yields a 10-year DSCR average of 3.6x for senior debt, 2.0x for first subordinate debt, and 1.5x for second subordinate. Year 10 leverage for total debt remains elevated at 14.5x.

Fitch's rating case considers a hypothetical recessionary stress in fiscal 2025 that results in a 4% decrease in use fees and container charges, followed by recovery through fiscal 2027 before growing at 3.0% per year thereafter. Fitch assumes administrative costs are 0.5% higher than base case assumptions. Fitch's rating case analysis yields a 10-year DSCRs average and year 10 leverage of 3.4x and 8.9x senior, 1.9x and 11.3x first subordinate, and 1.4x and 16.4x second subordinate, respectively.

Current metrics are considered adequate for their respective ratings; however, Fitch's base and rating cases require shortfall advances in order to meet obligations beginning in fiscal 2027 as a result of ACTA's back-loaded debt service obligations. The ratings could face negative pressure to the extent the authority becomes dependent on shortfall advances to meet obligations.

SECURITY

Bondholder security includes the pledged revenue stream, prior to paying reserve fund replenishment and administrative costs, and all other monies held by the trustee except for the M&O fund and the reserve account, both of which are for purposes of operating and capital maintenance of the corridor.

Pledged revenues consist primarily of the volume assessment charges payable by the railroads and debt service shortfall advances payable by the ports. Shortfall advances from the ports are subordinate to their own costs and debt obligations. A use and operating agreement among ACTA, the ports and the railroads govern the volume assessment of charges.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Alameda Corridor Transportation Authority (CA) has an ESG Relevance Score of '4' for Labor Relations & Practices due to follow-on impacts of labor relations between port tenants and longshoremen at the ports of Los Angeles and Long Beach during periods of contract negotiations, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com

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