Fitch Affirms Commonwealth of the Northern Mariana Islands' Airport Revs at 'B-'; Outlook Positive

CHICAGO--()--Fitch Ratings has affirmed the 'B-' rating on approximately $13 million of outstanding Commonwealth Ports Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI), senior series 1998A airport revenue bonds. The Rating Outlook remains Positive.

KEY RATING DRIVERS:

--Highly Volatile Enplanement Base: The airport system is an essential enterprise, serving as the gateway to and within the Mariana Islands. The enplanement base of 545,504 passengers is relatively small taking into account the overall population base and the island's more limited, weaker economy. Traffic performance is potentially vulnerable to underlying economic stresses given the significant component of traffic tied to the tourism industry. Revenue Risk-Resilience: Weaker.

--Limited Cost Recovery: Rate setting practices with airlines are not clearly established and have been observed to be more reactive, based on financial pressures, than proactive. In Fitch's view, the airports' limited pricing power could constrain financial flexibility under an adverse operating environment. Recent approval by the Federal Aviation Administration (FAA) to allow the airport to utilize 100% of passenger facility charge (PFC) collections for debt service provides enhanced cushion to manage revenue levels to support financial obligations while keeping airline costs stable. Revenue Risk-Price: Weaker.

--Moderate Capital Plan: The authority's capital improvement plan is modest at $44 million through fiscal 2015 and predominantly funded through FAA grants with no future anticipated debt issuances. To the extent that a significant portion of PFC revenue is needed for debt service, it could hamper the airport's ability to provide required matching funds and thus limit grant receipts. Infrastructure Development: Mid-range.

--Conservative Capital Structure: The authority maintains 100% fixed-rate, fully amortizing debt. Annual debt service payments are essentially level and final maturity on the bonds is in 2028. Debt Structure: Stronger.

--Improving yet Volatile Financial Metrics: CPA generated a robust coverage ratio of 4.2 times (x) (2.8x without 100% PFCs as gross revenues) for fiscal 2013 (unaudited figures). Still, coverage levels have greatly fluctuated over time and failed to meet the financial rate covenant test (1.25x) as recently as fiscal 2008. Partially mitigating this volatility is the very low leverage of 0.1x net debt-to-cash flow available for debt service (CFADS), supported in part by treating all PFCs collected as pledged revenues and improving balance sheet liquidity. Days Cash on Hand (DCOH) has grown significantly over the past four years to 352 days in fiscal 2013.

Rating Sensitivities:

--Continued improvements in the underlying service area economy and the airports' ability to maintain or grow its current traffic base;

--Sustained favorable trends in balance sheet liquidity and strong financial ratios over the next year would strengthen CPA's credit quality.

--Material declines in enplanement volume or in coverage, resulting from increased operating expenses and/or the CPA Board's failure to sufficiently apply the full collection of PFCs as gross revenues, could pressure the current rating.

--Identified longer-term capital projects that would rely on debt issuances for funding could lead to rating pressure.

SECURITY:

The series 1998A bonds are secured by a pledge of gross airport revenues generated by the operations of the airport, including Passenger Facility Charges eligible for payment of debt service. Fitch notes that CPA Board Resolution No. 2011-01 now designates all PFC Revenues as gross airport revenues.

CREDIT UPDATE:

The CPA airports are heavily reliant on tourism and leisure travelers, creating an elevated degree of vulnerability to economic recessions both within its narrow local market as well as to the larger, neighboring Asian markets. Enplanements tend to show elevated fluctuations over time. In fiscal 2013, enplanements decreased approximately 5%, mainly due to reduced interisland enplanements at Tinian and Rota Airports. Saipan airport, the authority's strongest and busiest airport retained demand from international passengers and increased utilization. Collectively, Delta Airlines and Asiana Airlines maintain their dominance with a combined market share of approximately 58% of total traffic. However, Delta's market share fell an estimated 7% in 2013, while Asiana's increased by nearly 8%. Overall, service remains essential to this island economy and management indicated that multiple airlines are looking to begin or increase service levels.

The airports set rates under a residual methodology with its carriers. However, the CPA has shown a history of reluctance to consistently pass through the full cost requirements given the fragile economy and nature of the airline industry, negatively impacting financial flexibility and resulting in past covenant violations. Management's actions in fiscal 2009 to increase airline rates have resulted in improved net revenues with coverage increasing well above the 1.25x requirement. Unaudited fiscal 2013 coverage is expected to be close to 4.17x following 3.33x coverage in the prior year, based on pledged revenues inclusive of all PFC collections. Providing somewhat of a consistent revenue stream to help service debt, non-airline revenues have been relatively stable over time and management continues to try to expand those sources.

Cost per enplanement (CPE) is estimated at around $16.10 for fiscal 2013 and is expected to remain in that range barring any wide swings in enplanements or changes to airline rates. Fitch notes that this level is similar to the new baseline CPE established when airline rates went up in fiscal 2009.

CPA's overall leverage is relatively high given the operational profile of the airports; however its net debt-to-CFADS is very low at 0.1x taking into account its growing liquidity (352 days cash on hand), reserves, and ability to use all of its PFCs as cash flow. As a result of the airport's improved operations, conservative capital structure, and flat debt service profile, Fitch projects coverage to remain at or above covenant through a five-year forecast period, even when only the eligible portion of PFCs for debt service are applied.

CPA's capital improvement plan through 2015 is modest at $44 million and 95% of the funding comes from FAA grants. The largest project is a $17 million Regional ARFF Training Facility that should be a revenue-generating project for the airports. Other projects include: rehabilitating the 30 year old runway, installation of new generators for the terminals, Tower and Airport Fire Station, and various renovations to the international and commuter terminal. These are in addition to several future anticipated projects. Management indicated that no future debt issuances are currently planned although the authority does not detail a longer range capital improvement plan so some uncertainty remains over facility needs and funding.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 2012);

--'Rating Criteria for Airports' (December 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 Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824831

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Scott Zuchorski
Director
+1-212-908-0659
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Scott Zuchorski
Director
+1-212-908-0659
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755