NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB-' rating on approximately $30.4 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 70% of import dependent revenue tonnage. Revenue Risk: Volume - Weaker
--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. Revenue Risk: Price - Weaker
--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. Infrastructure and development - Midrange
--Conservative Capital Structure: The authority maintains 100% fixed-rate, fully amortizing debt. Debt Structure- Stronger
--Moderate Leverage and Strong Liquidity: CPA currently maintains favorable leverage and liquidity metrics offset by modest coverage ratios. Leverage of 3.5x net debt-to-cash flow available for debt service (CFADS), and balance sheet cash and reserves available for operating expenses equating to over 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 2013 coverage of 1.33x.
--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 nearly 70% of all revenue tonnage, possibly indicating that a shift in the operational profile may be nearing completion and demonstrating the essentiality of the ports to the islands' survival. The islands rely on the ports for all of their necessities, which should make demand relatively stable given that imports should never decline to a critical point.
Due to a decrease in imports, total tonnage fell off by 13.1% to 355,572 metric tons. This figure is comparable to tonnage in 2011, which was 378,800 metric tons, and Fitch believes this will be near to the new baseline for CNMI.
Fiscal 2013 unaudited operating revenues were down 2.9% as a result of lower seaport fees and concession-based receipts. Operating expenses decreased by 11.6% due to a decrease in contractual services and employee benefits. Together, this resulted in estimated 2013 debt service coverage of 1.33x, which was flat compared to last year's 1.32x coverage. Debt service coverage has stayed largely stable in the 1.3x - 1.4x range since fiscal 2009's rate increase.
In the past, management was 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 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 2013, 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 2,264 days. This liquidity provides some degree of financial flexibility and translates to a moderate net debt-to-CFADS of 3.5x. 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. Fitch notes that a more forward-looking capital plan would be helpful in monitoring new projects and ensuring that any necessary maintenance and/or projects are not being deferred.
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