NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A' rating on Broward County, Florida's outstanding $224 million port facilities senior revenue and refunding bonds. All senior bonds are secured by net revenues from Port Everglades (the port). The Rating Outlook on all senior bonds is Stable.
KEY RATING DRIVERS:
Diversified Revenues with Some Cruise Exposure: The port benefits from diversified revenue streams from various business lines, notably cruise operations, container traffic, and petroleum distribution. The port's primarily local and regional cargo market limits its exposure to global trade volatility compared to peers. However, the port is exposed to fluctuations in the cruise business and to the competitive port environment in South Florida and on the east coast. Revenue Risk: Volume – Midrange
Cruise Market Exposure Mitigated by Contracts: Potential fluctuation in the discretionary cruise business adds risk to Port Everglades' revenue profile, as with most Florida ports. The existence of long-term guaranteed contracts with key cruise customers, accounting for 42% of 2013 operating revenues, partially mitigates this concern. Revenue Risk: Price – Midrange
Manageable Capital Program: The port's sizable yet flexible fiscal year (FY) 2014-2018 capital improvement plan (CIP) totals approximately $528 million in project costs, with 33% expected to be funded with new bond issuances. The port has benefited from $91 million in state grants for several projects in the CIP, and remaining funding is expected to come from the port's substantial current cash balance and excess cash flow in forthcoming years. Fitch takes the view that the port has sufficient financial capacity to raise required debt required for capital improvement purposes over the next few years. Infrastructure Development / Renewal – Stronger
Conservative Debt Structure: Debt is fixed rate, with the majority on the senior lien, and amortizes over relatively short timeframe, with final maturity in 2029. Debt Structure – Stronger
Strong Financial Profile: The port's strong financial profile has generated comfortable debt service coverage ratios (DSCR) above 2.0x and allowed the port to build its liquidity position--currently 943 days cash on hand excluding cash in the debt service reserve fund (DSRF). Leverage on the senior lien is extremely low at 0.3x net debt to cash flow available for debt service (CFADS) but could migrate upward as Port Everglades executes its capital program.
Significant Dilution to Current Metrics: : Sustained senior lien coverage below 1.7x and migration of net debt to CFADS meaningfully above 5.0x upon execution of the Port's five-year capital program could put the current rating under pressure.
Execution of CIP in a Down Cycle: Specifically, proceeding with the full borrowing component of the CIP in a low-to-no growth scenario could pressure the above metrics and the rating.
The revenue bonds are secured by a lien on, and pledge of, the net revenues derived from the operation of the port facilities and the moneys on deposit in specific funds and accounts established by and outlined in the resolution.
Historically, operating margins have been relatively stable at the port, averaging 43% and dropping below 40% only four times since 2000. Revenues have decreased year over year only twice over the same timeframe. Unaudited results for 2013 indicate revenue growth of 3.1% over 2012, reflecting higher scheduled cruise minimum annual guarantee (MAG) revenues from Royal Caribbean and Carnival and increasing petroleum tonnage serviced and distributed through the port.
Contract renewals with Royal Caribbean in 2008 and Carnival in 2010 included steadily increasing minimum guarantees and, separately, capital cost recovery charges allocated towards the now completed renovations of cruise terminals 2, 18, 19, 21, and 26. Since the Carnival agreement became effective in FY2011, these guarantees and capital cost recovery charges have accounted for 98% of cruise revenues and 41% of operating revenues. Such guarantees partially mitigate exposure to the discretionary nature of cruise activity, but the port remains vulnerable long term to the cyclical nature of the cruise industry and competition from other nearby ports.
Capital cost recovery charges pursuant to the agreement with Royal Caribbean are scheduled to decrease in FY2014, and management conservatively budgets a near-8% drop in cruise revenues. The addition in the 2013-2014 cruise season of sailings and passengers relating to Royal Princess and two additional ships being repositioned for the summer of 2014 should offset the drop in MAGs to some degree. Cruise revenues overall accounted for 42% of operating revenues in FY2013, with container revenues and petroleum revenues comprising 21% and 19%, respectively.
Operating expenses have been largely contained over the course of the last five years, having increased 0.5% since 2008. This growth compares to projected growth at the time of the 2009A bond issuance of 4.8%. Given the timing of several capital projects coming online, the budget indicates expenses are likely to increase in coming years. Given the port's CIP commitments, which could include as much as $175 million in new debt over the course of the next five years, it will be important for management to continue to control its expense profile going forward.
Financial performance of Port Everglades has historically been strong. DSCR on the senior lien has averaged 2.3x since 2000, including refunding savings produced in fiscal 2012 by the 2011A, B, and C issuances. The port has maintained strong cash and investment balances in recent years as well, with 943 days cash on hand on the balance sheet in FY2013 ($206 million cash and investments in FY2011, $226 million as of September 2012, and $194 million in FY2013) while paying for capital improvements. The port intends to continue the use of these funds for pay-go capital investments in its capital program.
Looking forward, senior coverage is expected to migrate south of 2.0x as future debt service associated with the Port's capital program comes online. The largest elements of the program are port-wide dredging projects and the Southport Turning Notch Extension project, which will add five new berths for container ships. Combined these projects make up $219 million out of the $528 million program.
Fitch's base case assumes a revenue compound annual growth rate (CAGR) of 1.1% through 2018 off the base of 2013 revenue as stated in the unaudited results, and a 3.5% expense CAGR over the same time period. Senior annual debt service requirements grow to $34.2 million from $28.8 million, as debt service ramps up on new issuances and falls on existing debt. Coverage reaches a minimum of 1.9x in 2018 on the senior lien and 1.7x on an all-in basis including subordinate lien debt service. Net debt to CFADS rises to 5.2x upon issuance of $175 million in new debt and as the Port employs cash balances to complete the entire scope of its capital program.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Ports' (Oct. 3, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Ports