UNION PACIFIC CORPORATION
Fitch Ratings has assigned an 'A' rating to the
The Rating Outlook is Stable.
Fitch rates ACTA's
ACTA also has
RATING ACTIONS
Entity / Debt
Rating
Prior
LT
A
Affirmed
A
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
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,
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 rate increases to changes in the regional consumer price index (CPI). Annual rate increases are 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
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 55% of total outstanding debt in the form of capital appreciation bonds. The lower debt structure score of 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 in the medium term unless additional restructuring occurs.
Issuances in 2022 helped alleviated some of ACTA's near-term shortfall advances by reducing annual debt service over the near term, and the 2024 issuances will further alleviate shortfall advances through 2033. While the 2024 transaction may result in an extension in overall maturity of the debt, repayment remains within the term of ACTA's operating agreement (expires 2062). The authority may pursue additional restructuring opportunities in one or more transactions between 2024 and 2026 to address the medium-term shortfall advances.
Financial Profile
ACTA's all-in coverage was strong in FY 2023 at 1.7x, up from Fitch's base case expectation of 1.6x at last review. 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). Depending on the share of bondholders accepting the proposed tender in the 2024 transaction, metrics may improve modestly, though debt maturity may also be extended.
Overall, ACTA's coverage ratios are at the upper end of Fitch's indicative guidance for ports, supporting Fitch's view that additional financial cushion is necessary to offset ACTA's increased volume and price risk. Rating case year 10 leverage (including contingent obligations and administrative costs) is high for the senior and first subordinate lien at 7.3x and 8.5x, respectively, and elevated on an all-in basis at 12.8x. 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 consolidated leverage being above 15x.
TRANSACTION SUMMARY
ACTA is pursuing an ongoing plan of finance to reduce or eliminate projected revenue shortfalls to support debt service payments through bond year ending
Proceeds of the series 2024A and 2024B senior bonds will be used pay the purchase price to holders of the 1999A, 1999C, and 2022B bonds who accept the tender offer, to fund the debt service reserve fund, and to cover costs of issuance. Proceeds of the series 2024C and 2024D subordinate bonds will be used to pay the purchase price to holders of the 2004A and 2004B bonds who accept the tender offer, to fund the debt service reserve fund, and to cover the costs of issuance.
ACTA has assumed that approximately 20% of the outstanding 2026-2033 maturities for the series 1999A&C bonds (senior lien) and 2004A&B bonds (subordinate lien), and 20% of the outstanding 2046 maturity of the 2022B bonds (senior lien) will be tendered, with the proceeds of the 2024 bonds being used to fund the purchase. The current transaction may extend the final maturity of ACTA's existing debt from 2052 to 2062, reduce ACTA's near-term debt service obligations, and alleviate the need to call on shortfall advances from the SPB ports until bond year 2033. The final par amount of the series 2024 bonds will be subject to tender participation.
CREDIT UPDATE
In 2022 and the first half of 2023, ACTA activity levels were affected by declines in Port twenty-foot equivalent unit (TEU) volumes, reflecting a variety of factors including normalization of trade patterns following a pandemic related spike in consumer activity; and discretionary cargo shifts to other gateways due to potential west coast slowdowns during labor contract negotiations. Port throughput decreased 5.1% in calendar 2022, but has since returned to pre-pandemic levels following ratification of the
In late 2021 and early 2022, ACTA's capture rate of Port TEU volume also declined, reflecting shipping and logistics industry developments including delays and congestion among railroad service providers. To mitigate uncertainty, some
shippers shifted from rail to higher-cost truck services in order to better guarantee shipping times. However, ACTA's capture rate has since rebounded to levels consistent with historical averages (on average 28% in FY 2023 and 27% for FY 2024 through September). Management expects capture rates to normalize in the medium term as volumes return to lower cost rail corridors.
ACTA's fiscal 2023 TEU volumes decreased by 1% from the prior year, a modest decrease after a 16% drop in 2022. For the first three months of FY 2024 through September, volumes have fallen a further 13% but have moderated in recent months. As with the port's volumes, the declines largely reflect shifts to other gateways due to a combination of supply chain delays/congestion concerns along with uncertainty around labor contract negotiations, contributing to a shift of volumes from West to East and
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, 2023 revenues are 3.2% higher than in Fitch's prior year base case expectations for 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 2022, and represents a modest 2% increase over fiscal 2021.
FINANCIAL ANALYSIS
Fitch's base case incorporates ACTA's actual loaded TEUs for 2023 followed by 1.5% growth thereafter. Fitch also assumes fees in 2024 grow according to Fitch's
Fitch's rating case considers a hypothetical recessionary stress in 2024 that results in a decrease in loaded TEU volumes, followed by recovery through 2027 before growing at 1.0% per year thereafter. Fitch assumes fees and administrative costs follow base case assumptions. Fitch's rating case analysis yields a 10-year DSCRs average and year ten leverage of 3.4x and 7.3x senior, 1.9x and 8.5x first subordinate, and 1.4x and 12.8x second subordinate, respectively. Metrics are expected to improve with the proposed tender offer, though exact metrics will depend on the share of bonds tendered.
While current metrics are considered adequate for their respective ratings, both Fitch's base and rating case require shortfall advances in order to meet obligations through debt maturity as a result of ACTA's back-loaded debt service obligations. Credit quality could be compromised to the extent the authority becomes dependent on shortfall advances to meet obligations.
The 2024 transaction is part of ACTA's ongoing effort to address its escalating debt service profile and alleviate medium term shortfall advances. The magnitude of the mitigation achieved by the 2024 issuance, as well as degree to which the overall debt maturity might be extended, will depend on the share of bondholders who participate in the tender offers. ACTA may also pursue additional restructuring opportunities in one or more transactions between 2024 and 2026. Fitch views positively the long tail currently provided by the operating agreement and the presence of call options within ACTA's debt structure, which should provide for sufficient financial relief via a refunding or restructuring transaction.
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.
Date of Relevant Committee
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
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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