Fitch Affirms Port of Palm Beach District, FL's Revs at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed its 'BBB-' rating on the Port of Palm Beach District, FL's (the port) approximately $11.4 million in outstanding series 2005 revenue bonds. The Rating Outlook is Stable.

The port also has $5 million in outstanding series 2002 revenue bonds that are not rated by Fitch and $19.5 million in unrated bank loans outstanding, both of which are on parity with the rated revenue bonds.

The affirmation reflects the projected revenue growth from increasing cruise activity in conjunction with minimum lease payments from newly signed and existing tenants. These sources will adequately support the financial obligations of the port going forward. In addition, adequate liquidity enhances the port's overall financial flexibility and ability to maintain debt service coverage at minimum coverage requirements.

KEY RATING DRIVERS:

VOLATILITY IN OPERATIONS AND STRONG COMPETITION: The port's elevated risk profile and significant dependency on regional demand and discretionary income, which are strongly correlated to economic cycles, coupled with the highly competitive South Florida port environment, remain a concern. The port's continued financial recovery is highly dependent on cruise activity. Revenue Risk: Volume - Weaker

NARROW OPERATING BASE: The port's narrow revenue base has been under pressure in recent years. While unaudited results indicate that total operating revenues increased by over 7.6% in fiscal year (FY) 2013 (ended Sept. 30) to $15.4 million, sustainable positive revenue generation still remains uncertain. Revenue is somewhat diversified across rental, cargo and cruise related streams, with overall base rental income providing approximately 30% of total operating revenue. Long-term leases partially offset volatility associated with cargo and cruise operations; however, 51% of the port's operating revenues are generated from contracts with its two largest tenants. Nevertheless, a new long-term agreement with Tropical Shipping until 2018 includes minimum annual guarantees is considered a credit positive. Revenue Risk: Price - Midrange

MODEST CAPITAL PLAN: Management has identified approximately $43.5 million in potential capital improvement projects through FY2017, of which approximately $29.3 million is expected to be grant funded, with remaining expenditures covered by internally generated funds. Infrastructure Development/Renewal - Midrange

CONSERVATIVE DEBT STRUCTURE: The port's capital structure features all fixed-rate debt, demonstrating a level debt service profile and a 13-year tenor. Debt Structure - Stronger

MODERATE LEVERAGE AND ADEQUATE LIQUIDITY: According to unaudited FY2013 financial results, the debt service coverage ratio (DSCR) net of operating expenditures improved slightly in the year to 1.67x from 1.65x in FY2012. The district's financial leverage is currently moderate, with net debt to cash flow available for debt service (CFADS) at 3.47x. The port and has no additional near-term debt raising plans and maintains over 380 days cash on hand, providing additional financial flexibility.

RATING SENSITIVITIES:

--Inability to maintain a stable level of top-line revenue growth, or management's inability to control expenses and comfortably meet its 1.10x net revenue rate covenant from operational cash flow.

--Failure to extend and/or replace maturing long-term agreements as and when due.

--Material loss of cargo and cruise activity would likely lead to negative credit rating action given the port's narrow operating base.

SECURITY:

The revenue bonds are secured by a pledge of gross port operating revenues.

CREDIT UPDATE:

The port's revenue base weakened and exhibited substantial volatility in the years between FY2006 and FY2011, declining at a 1.7% compounded annual growth rate (CAGR). Cruise revenues have stabilized over the last two years with the addition of a multi-day cruise line, Bahamas Celebration, which signed a five-year lease with the port in March 2010. The port's cruise passenger figures and parking income continued to increase slightly in FY2013 from the prior year, with total operating revenues up approximately 7.6% from FY2012. Revenue growth is also attributed to increased container tonnage, as well as larger molasses and sugar throughput. These increases were somewhat offset by a decline in fuel shipments triggered by renovations at a nearby power plant.

The port's FY2014 budget assumes increased cruise activity from the new day-cruise operator, Island Breeze, which is scheduled to begin servicing the port in March 2014, operating on a 10-year agreement. Cruise income at the port accounts for approximately 12% of operating revenue but also generates significant parking revenues (6% of operating revenues). Fitch views the significant competition from other nearby ports for cruise passengers combined with the narrower type of cruising offered at the port as constraining any meaningful and predictable growth in this business line.

In light of revenue declines through FY2011, management was able to reduce operating and maintenance expenses at a 3.9% CAGR between FY2006 and FY2011. Expenses increased by approximately 2.1% in FY2012, reflecting higher healthcare costs and other marginal cost increases. In FY2013, the district realized a 14% increase in operating expenses mostly due to a one-time roof repair cost. The FY2014 budget assumes essentially no growth in operating expenses from the prior year's unaudited results.

DSCR on a net revenue basis slightly improved in FY2013 to 1.67x, compared to 1.65x in FY 2012. Fitch expects revenue growth in FY2014, recognizing the port's assumed increases in cruise activity from a new one-day cruise. Fitch also anticipates stabilization and possibly slow growth in the medium term as cargo and bulk volumes continue to recover from depressed levels, reflective of the region's economic growth. To the extent that the port is unable to extend or replace its long-term agreement with one of its largest customers, Bahamas Celebration, and fails to maintain long-term relationships with its largest revenue-producing tenants, downward rating pressure would likely be warranted.

Fitch notes the availability of approximately $20.5 million in unrestricted cash and unencumbered capital and maintenance reserves available for annual debt service and/or operating expense provides the port with some cushion to withstand weather events or other short-term interruptions in service. The port's current capital plan does not include any future debt issuances and centers on rehabilitation of Slip 3. Approximately $2.3 million of total project costs will be directed towards the Slip# 3 redevelopment and $5 million will be directed toward the Berth 17 enhancement. These will both be funded with the port's unrestricted cash and capital improvements reserves, but management plans to maintain about $7 million in unrestricted cash going forward.

Palm Beach operates as a landlord-tenant port, entering long-term leases with various shipping and terminal companies for waterfront property and facilities. In addition to the base rent the port receives under these leases, the port also levies cargo-based tariffs for ship docking, cargo transit, and other port activities.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Ports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719985

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823905

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman, +1 212-908-0716
Director
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Emma Griffith, +1 212-908-9124
Director
or
Tertiary Analyst
Samuel Marsico, +1 212-612-7810
Analyst
or
Committee Chairperson
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman, +1 212-908-0716
Director
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Emma Griffith, +1 212-908-9124
Director
or
Tertiary Analyst
Samuel Marsico, +1 212-612-7810
Analyst
or
Committee Chairperson
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com