CHICAGO--()--Fitch Ratings affirms the 'BB-' rating on approximately $31.6 million of outstanding Commonwealth Ports Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI), senior series 1998A & 2005A seaport revenue bonds. The Rating Outlook is Stable.
KEY RATING DRIVERS:
--Concentrated But Vital Cargo Base: The seaports remain essential for the import of goods to an island economy; however, there is potential for stagnant operational trends due to CNMI's exposure to macroeconomic factors and its elevated dependence on a limited tourist base. Volume stability is expected given that food and fuel related cargos account for approximately 73% of import dependent revenue tonnage.
--Limited Pricing Power: CNMI's narrow economy and the overall recession limit management's economic flexibility to raise rates on seaport system tenants and users. Following the last increase in 2009, the authority's focus has instead been on effective containment of operating expenses.
--Conservative Capital Structure: The authority maintains 100% fixed-rate, fully amortizing debt.
--Moderate Leverage And Strong Liquidity: CPA currently maintains favorable leverage and liquidity metrics offset by modest coverage ratios. Leverage of 3.8 times (x) net debt-to-cash flow available for debt service (CFADS) and balance sheet cash and reserves available for operating expenses equating to nearly 2,000 days cash on hand (DCOH) provides the CPA with some degree of flexibility to meet financial commitments in weak performing periods. Further, coverage levels appear to have stabilized in the 1.3x - 1.4x range with estimated fiscal 2012 coverage of 1.32x.
--Modest Capital Plan: The authority's capital improvement plan is manageable in scope and is predominantly grant funded. The remaining dollars are expected to come from internally generated funds with no future debt issuances currently anticipated.
WHAT COULD TRIGGER A RATING ACTION:
--Continued changes in the underlying service area economy and the seaport's ability to maintain base cargo levels at or near current levels;
--Depressed debt service coverage levels resulting from declining operating revenues despite growth in revenue tonnage;
--A shift in the seaport's short-term liquidity and financial flexibility resulting from changes in operating expense management or pricing power.
The seaport bonds are secured solely by gross seaport revenues and certain accounts established pursuant to the bond indenture.
CNMI's limited economy is subject to macroeconomic factors and a diminished tourist base. Its ports' revenue tonnage is now nearly 100% from imports and concentrated in two main commodities (fuel and food), following the loss of the garment industry. Collectively, fuel and food represent over 70% of all revenue tonnage, potentially indicating that a shift in the operational profile may be nearing completion and demonstrating the essentiality of the ports to the island's survival.
As a result of improved tourism, fiscal 2012 revenue tonnage grew 8.1% to 409,317 metric tons, erasing the 1.4% decrease experienced in fiscal 2011 and continuing upon the 5.1% growth experienced in 2010. Tonnage increases are the result of inbound cargo growth, with exports continuing to spiral downward and only accounting for 3.5% of total revenue tonnage. Fitch believes that the seaports may be at or near a new baseline cargo level that is tied more closely to the economic activity of CNMI.
Declines in operating revenues despite the volume growth, as occurred in fiscal 2012, would be a potential credit concern if such trends continue. Fiscal 2012 unaudited operating revenues were down 4.5% as a result of lower seaport fees and concession based receipts. Operating expenses rose 3.1% due to increased maintenance costs. Together, this resulted in estimated 2012 debt service of 1.32x which was in line with the CPA's budgeted coverage of 1.31x. While coverage is down slightly from 1.41x a year ago, debt service coverage has been largely stable in the 1.3x - 1.4x range since fiscal 2009.
In past years management has been reluctant to raise rates, which led to rate covenant violations in 2007 and 2008. Following that period, actions on rates appear to have reversed the coverage deficit when combined with the austerity measures on the expense side. Fitch notes, however, that should coverage levels continue to decline as a result of diminished operating revenues, especially in times when volume levels are stable or improving, negative rating action could be warranted.
Following fiscal 2012, Fitch believes that cash flows should continue to be sufficient to cover debt service through its five-year forecast period and takes comfort in the CPA's strong liquidity and fixed-rate, flat debt service profile.
CPA maintains fund balances of over $13 million related to the bond indenture and has increased DCOH (including reserves available for operating expenses) to 1,960 days over the past four years. This liquidity provides some degree of financial flexibility and translates to a moderate net debt-to-CFADS of 3.8x. Further, management does not anticipate any future debt issuances at this time.
The authority's capital improvement plan is modest and primarily grant funded with a 25% match required from the CPA. Current grants include a $950,000 grant from the Department of Homeland Security to improve security at the ports and another from CNMI/DOI for repair work. The CPA, however, is having trouble securing all of the funding needed for its desired improvements given the weakened economy and reduction in available governmental funds. Fitch intends to monitor the situation to ensure any necessary maintenance and/or projects are not being deferred.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 11, 2012;
--'Rating Criteria for Ports', dated Sept. 27, 2012.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Ports