Back in December, we wrote about ports and “Rotten Apples” in our MuniLand Market Bullet. The labor dispute and slowdown at the West Coast ports were already impacting agricultural exports. Fast forward two months and a tentative settlement has been reached after the significant curtailment in port operations affected not just agriculture, but all industries that depend on imports/exports. In our opinion the labor slowdown will have little impact on the overall credit quality of West Coast ports. For example, Long Beach Harbor’s 5-year average debt service coverage ratio is about 3.5x, and 5-year average free cash is ample at about 7x annual debt service requirements. Moreover, operating margins (before interest expense and depreciation) are a very healthy 42% on average over the last 5 years. These ratios indicate that Long Beach Harbor has an exceptional ability to repay their debt. Moreover, such robust ratios provide significant downside protection from unexpected events – like a labor shutdown. Many of the top tier West Coast ports share similarly robust credit metrics.
The ancillary impacts from the port slowdown will be much more far-reaching. In June 2014, The National Association of Manufacturers and the National Retail Federation commissioned a report by INFORUM (Interindustry Forecasting Project at the University of Maryland) to measure the impacts from West Coast port stoppages. The study estimated that a 20-day West Coast shutdown would reduce GDP by 0.29% through export losses, import delays, higher costs and reduced consumer purchasing power. Deutsche Bank’s economics team estimates that the current slowdown may reduce fourth quarter U.S. GDP by 1% (annualized). The major losers are the U.S. consumer and agricultural exporters because of delays, higher prices and spoilage. One of the winners from the situation is the Prince Rupert Port in British Columbia, Canada. The port is strategically closer to Asia, and railroad routes actually allow for quicker shipping times to Chicago and East Coast markets than the ports of Long Beach and LA. However, the relatively small size of the port limits its ability to take significant tonnage over the long term from U.S. West Coast ports.
Sources: “The National Impact of a West Coast Port Stoppage” INFORUM, June 2014; Deutsche Bank; SNWAM