The Alameda Corridor has Success Written All Over It … Except for that Boat Load of Debt

LA WATCHDOG - The Alameda Corridor, the 20 mile rail expressway connecting the Ports of Los Angeles and Long Beach (the “Ports”) with the downtown rail yards of Union Pacific and Burlington Northern that serve as gateways to the rest of the country, has been an outstanding success, allowing the Ports to accommodate their significant growth over the last ten years.

Underlying the success of this $2.3 billion multi track railway is the ability of container laden freight trains, some of which are 8,000 to 10,000 feet long, to reach the downtown rail yards in 30 minutes compared to three to four hours before the Corridor was opened in April of 2002.


And even with the slowdown in the economy, every day the Alameda Corridor accommodates 40 to 45 trains carrying almost 12,000 containers.  

The Corridor has also significantly eased traffic congestion as it eliminated over 200 at grade crossings that existed under the previous system of branch lines, primarily because of the Mid Corridor Trench, a 10 mile long cut that is 33 feet deep and 50 feet wide that runs between Route 91 in Carson and 25th Street in downtown Los Angeles.

Another benefit in addition to eliminating long waiting times at railroad crossings is significantly lower levels of pollution as faster and more efficient trains encourage shippers to use rail rather than higher emission trucks, further reducing the level of truck traffic on our already congested freeways.

However, while the Alameda Corridor is an efficient and well managed operation that has made major contributions to the efficiency and productivity of our regional economy, there are significant financial issues as a result of too much debt based on overly optimistic projections.

When designing the refinancing for the Alameda Corridor in 2004, the two Ports, their financial advisors, and investment bankers realized that over the next ten years, the projected revenue stream from container fees would be insufficient to pay the interest charges on almost $2 billion in debt.  

This problem was solved by assuming that Alameda Corridor revenues would double over the next the years as a result of increased container shipments and modest price increases. This implied an uninterrupted growth rate of 7% per year.

Based on these projections, the Alameda Corridor sold investors a nonconventional package of zero coupon bonds (called Capital Appreciation Bonds) and deferred interest bonds (called Convertible Capital Appreciation Bonds), allowing the Alameda Corridor to defer the payment of an estimated $500 million in cash interest expense over an eight year period beginning 2005.

This financing structure allowed the Alameda Corridor to continue to operate even though its Operating Income before Depreciation only covered 70% of its interest expense, to say nothing about the need to finance its capital expenditures and principal repayments of debt.

Unfortunately, this highly leveraged capital structure predicated on rosy projections lacked any financial flexibility and was therefore unable to withstand the impact of the world wide recession and revenues that were significantly lower than projections.

As a result, Standard & Poor’s downgraded the Alameda Corridor’s senior credit rating to A – (A minus) and its subordinated debt rating to BBB+ despite the fact that 40% of the Alameda Corridor’s debt service payments are guaranteed by the two Ports, both rated AA (Double A).

To survive the upcoming cash crunch, the Alameda Corridor entered into an agreement to sell $83.7 million of senior bonds to the Federal Railroad Administration under its Railroad Rehabilitation Improvement and Financing program, conditioned on the two Ports (not the Alameda Corridor) guaranteeing the payment of a $7 million surety bond.

The proceeds from this June issue of senior notes was used to repurchase $83.7 million of bonds that mature between 2014 and 2019, thereby alleviating the immediate cash crunch, once again kicking the can down the road.

Even then, the two Ports are projected to be on the hook for $53 million for the fiscal years 2013 to 2023 as a result of their agreement to support the debt service requirements of the highly leveraged Alameda Corridor. But the good news is that without the bailout financing, the obligation would be $121 million.

The ability of the Alameda Corridor to meet its financial obligations on over $2.1 billion of debt (now equal to 95% of its total assets) is dependent primarily on a significant increase in the volume of containers hauled by the railroads as unit price increases for each container are contractually limited to around 2% a year.

So the financial health of the Alameda Corridor is reliant in large part on the ability of the Port of Los Angeles to increase the number of containers that it handles every year.

But as discussed in the CityWatch article of July 2, “Something Is Fishy at the Port of Los Angeles”, our Port is facing considerably more competition from other West Coast ports, including those in Canada and Mexico, and from many East Coast and Gulf Coast ports once the widening of the Panama Canal is completed in 2014.  

Our Port is not only considerably more expensive than its competitors, but is viewed as being unreliable because of past labor actions.  

Coupled with the City’s unfriendly business environment that has alienated the trucking industry and major retailers, many shippers and importers have devised strategies to lessen their dependence on the Port of Los Angeles.

If the Alameda Corridor experiences financial difficulty now or in the future, 50% of the $2.1 billion in debt will essentially be the obligation of the Port of Los Angeles. This, in turn, would double the debt load of our Port, thereby endangering its credit rating.

The politically appointed General Manager, the Mayor’s five appointees on the Harbor Commission, and the rest of City Hall will spin a tall tale that our Port is excellent financial condition as it gets ready to embark on a debt financed $1.5 billion expansion plan.

But do you trust Mayor Villaraigosa, Controller Wendy Greuel, and the Herb Wesson City Council when it involves our money, recognizing that these are the same financial wizards who are responsible for the near insolvency of our City?

The Port of Los Angeles and the Alameda Corridor are too important to the economy of Southern California to be left in the hands of City Hall.  That is why we need a thorough and independent review of the operations, finances, and management of the Port of Los Angeles and the Alameda Corridor.

(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- www.recycler.com. He can be reached at: lajack@gmail.com)
–cw




CityWatch
Vol 10 Issue 61
Pub: July 31, 2012